Saving in a Weak Economy

Piggy attended the Zimbabwe Association of Pension Funds (ZAPF) Conference that was held in Nyanga. The theme of the conference was; “Closing the Savings Gap – Restoration of Confidence in the Pensions Industry”. The conference covered critical topics affecting the industry and Piggy was particularly intrigued by the discussion topic titled, “Saving in a Weak Economy”. The paper was presented by Shepherd Fungura; the Group Chief Executive Officer of ZB Financial Holdings. As highlighted during the discussion, a weak economy is one in which growth is slow or negligible in macroeconomic terms. This may be a result of weak aggregate demand, low consumer confidence, high interest rates, structural issues that constrain economic growth such as an ageing population, dominance of low growth industries, presence of predatory local entities or government policies that discourage growth. Some signs of a weak economy include worsening unemployment rates, rising inflation, declining property sales and increased household debt defaults.

Piggy is concerned about poor macro-economic fundamentals in Zimbabwe and the impact it has on household incomes.  The major concern has been the threat of inflation and decimation of savings. Inflation can reduce the value of savings as these may not grow fast enough to offset the impact thereof. In addition, inflation reduces the amount available to save especially if wage inflation lags price inflation.

There are several reasons why individuals and households save. This includes (i) retirement planning, (ii) education funds for dependents, (iii) unforeseen expenses and emergencies (medical), (iv) big purchases (buying a home or a car), (v) vacations, (vi) financial independence, (vii) wealth building and (viii) securing an inheritance. Investing and saving is also critical for a developing economy like Zimbabwe given that it;

  • Promotes capital formation. The increase in aggregate savings leads to an increase in capital which is associated with higher GDP growth;
  • Creates employment opportunities. An increase in the economic growth promotes employment opportunities; and
  • Controls excess liquidity. Increased liquidity in an economy drives inflation.

It is against such a background that there is a need to create effective mechanisms for saving. For example, Rotating Savings and Credit Associations (ROSCAs) function by taking monthly deposits from each member of a group and then giving the whole monthly sum to one member of the group.  The recipient of the monthly sum is based on a predetermined rotation, ensuring each participant will eventually receive a large pay-out. This has proved to be an effective way of saving amongst most households in Zimbabwe. Other mechanisms include Accumulated Savings and Credit Associations (ASCAs) that require group members to make regular contributions. Instead of rotating pay-outs, the ASCA group fund is used to make loans that are paid back with interest. Loans are made either to group members or trusted third parties. 

Illustration of Savings Mechanisms

Source: ZAPF

As concluded at the conference, there is need to encourage savings even in a weak economy. Government, regulators, pension funds and other related institutions need to both encourage and support savings at all levels of the economy. There is also a need to create new assets and investment vehicles while also driving the financial inclusion agenda. That is why Piggy is fanatical about investment clubs and the emergence of new products such as Exchange Traded Funds (ETFs) on our local capital markets. ETFs possess characteristics of a Unit Trust but are also different. An ETF is a basket of securities that trade on an exchange, just like a stock. ETF prices fluctuate all day as the ETF is bought and sold. This is different from unit trusts that only trade once a day after the market closes. The major advantage of an Index tracking ETF is that it replicates the makeup of an index and therefore gives the investor a performance that mirrors the underlying index. In addition, the ETF is a cheaper way of getting access to a wide array of stocks. Get more tidbits on the stock market by joining a PiggyBankAdvisor Telegram Channel (+263 78 358 4745).