Given the harsh economic environment it’s difficult to talk about savings, but I think that it’s imperative especially for young Zimbabweans to consider saving money. It’s true that the economic conditions make it very difficult for people to save as many are living from hand to mouth.
The Ritesh Anand Column
Survival rather than savings is the order of the day.
According to the recently published FinScope Consumer Survey Zimbabwe 2014, 53% of adult Zimbabweans do not save. Main reasons for not saving are that 69% of adults claimed to have insufficient money to save after living expenses and 19% have no income in order to save.
Of the 47% of adults who currently save, 35% save to cover living expenses while 21% do so for education and school fees. Only 19% save for non-medical emergencies.
Over the last two decades, savings rates have fallen significantly in Zimbabwe as the economy nosedived. Furthermore, the period of hyperinflation destroyed the little savings people had accumulated and created an air of mistrust.
There are a number of people, especially the elderly, who continue to suffer today due to the evils of hyperinflation. Many people held cash during this period which failed to keep pace with hyperinflation.
Equities and property were the best hedge against inflation then, but many people were perhaps too nervous to buy equities or property. The few that did are still reaping the rewards. Savings are critical to the long-term growth and success of a country.
People appear to have lost faith in the financial system though and prefer instead to keep money under their mattresses.
The high rates of interest being offered by some local banks have failed to attract long-term deposits. The return of capital is more important than the return on capital.
We need to redevelop a culture of savings. People need to learn to live within their means while putting aside some funds for a rainy day or educating their children. We need to do more to encourage long-term savings and rebuild trust and faith in financial markets.
In the mid-990s, Zimbabwe had a thriving capital market with all forms of investment, money market, equities, property, private equity, as well as derivatives. I started my career managing unit trust funds for First Mutual Life. Then, people could save as little as ZW$25 a month.
We had over four different funds so investors could select the fund that best suited their risk profile. Today, the unit trust market has shrunk significantly due in part to the tight liquidity conditions, but also the lack of understanding.
Zimbabwe has a young and vibrant population and its imperative we encourage them to save. The future wealth of this country is dependent on their ability to save rather than spend. The culture of savings has played a significant role in the growth and success of many Asian countries, including China.
So what investment options do people in Zimbabwe have today. There still are money market funds as well as equities. Over the last four years, money market investments have done well given the high interest rate environment. Equities have performed below expectations especially last year as the market fell 20%. Over the long-term, equities will outperform money market investments.
The Barclays Bank Equity Gilt Study is the United Kingdom’s foremost source of data and analysis on long-term asset returns, with data going back to 1899. The study has been published every year since 1956 with a huge range of findings, but its most important message has remained consistent throughout that time: over the long-term, equities have delivered better returns on average than cash or bonds.
Barclays’ research shows that since 1899, Barclays UK shares — as measured by the Barclays UK Equity Index — have produced an average “real” (adjusted for inflation) annual return of 5,1%. That compares with 1,2% for government bonds (gilts) and 0,8% for cash, as measured by the Barclays UK Gilt Index and Barclays UK Treasury Bill Index respectively.
Not many of us have a 100-year investment horizon, but the same holds true for shorter periods. Over 50 years, equities have produced annualised real returns of 5,5% a year, while gilts have delivered 2,5%. Over 20 years, the respective figures are 4,1% and 3,5%.
Of course, equities have also been much more volatile than bonds.
Last year, the Zimbabwe Stock Exchange lost by 20%. In 2013, the market was up over 30%. Emerging market equities in general have higher volatility, but have historically generated higher returns.
When is the best time to start saving? The chart above illustrates the monthly savings required to get to US$1 million by the age of 65. If you start saving at the age of 20, you only need to put aside US$361 per month versus US$1 436 if you start saving at the age of 40.
As mentioned earlier, savings are critical for the long-term growth and development of Zimbabwe. Asia has developed rapidly over the last few decades due the culture of savings. Our young people need to be encouraged to save in Zimbabwe and thus contribute to its development.
On an individual level, the earlier one starts saving the better. Further, equities will outperform money market investments over the long-term. We need to rebuild our capital market and restore investor confidence.
We need to learn to live within our means and learn to save. We need to build a better future for Zimbabwe through savings and it begins with you and me.