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South Africa's Low Savings Rate and Investment


South Africa's Deputy Finance Minister Nhlanhla Nene has warned that the country's low savings rate is restraining the economy's growth. Because of the low savings rate, the country's current account deficit is growing and as a result, it is becoming increasingly dependent on foreign capital inflows.


"Persistently high current account deficits can lead to macroeconomic instability if foreign liabilities rise too much and foreign capital inflows dry up," Nene said. "By reducing a country's dependence on foreign capital inflows, higher domestic saving therefore makes an economy less vulnerable to sudden reversals in capital flows."

The low savings rate is a result from the central bank's 2006 cut in interest rates, which gives incentives to spend more and save less. Investment levels depend on loanable funds and if they are too low, domestic investment will be low as well.


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