In a sample of 25-odd developing countries that make up acronyms like Next-11, MINT, BRICS, ASEAN, BIMSTEC and CIVETS, Iran at 38% had one of the highest savings rate in 2016. It had prominent emerging economies like China, Korea, Thailand and Indonesia for company. A high savings rate translated into a healthy investment rate in Iran, which was 34% in 2016. Channelizing of savings into productive investment augurs well for future capacity. That year it also saw a high growth in imports, leading one to assume part of this had pertained to machinery and equipment, thus connecting it with the high investment rate. This joins its reasonably healthy share of manufacturing within GDP, which at ~35% is higher than India, Turkey, Russia, Philippines, South Africa and Pakistan. All text-book so far!
But why is this dipping?
The average savings rate in Iran for the 5 years till 2016 was 43%, i.e. it steadily dipped from 48% in 2013 to 38% in 2016. Such a dip was not noticeable in China, Korea, Thailand and Indonesia. This is partially explained by the drop in crude prices at that time which hit the oil-exporting companies. After all, gross savings includes not only households, but also government and corporations. A similar drop in savings rate was also observed in other oil-exporting markets like UAE, Saudi Arabia and Nigeria in our sample of 25-odd developing economies. So while the rise in global oil prices expanded Iran’s gross savings in the 2000s, its effect subsequently reversed.
But is the drop in savings also due to consumption behavior? During this 5-year period, Iran’s per-capita income rose by 1% CAGR, the 2nd-lowest in our sample after Brazil. In other words, its gross income remained flat. While UAE, Saudi Arabia and Nigeria also saw dampened per-capita growth, it was still higher than Iran. Iran’s unemployment rate itself was unchanged at about 10-12%. So it was the same strength of workforce that saw the dip in savings. Now, the country’s net disposable income expanded in this period as inflation declined from 30%+ levels to single-digits, the sharpest drop amongst our sample markets. This is an achievement of the government, as it reversed nearly a quarter-century of high inflation following accords that removed many trade sanctions. This expansion would have driven the propensity to consume. But this desire for new-consumption grew so rapidly that it not only ate the incremental net disposable income but also ate partly into what they used to save earlier; resulting partly in the drop in its savings rate since 2013. In simpler terms: a Riyal increase in net income led to a more-than proportionate increase in consumption!
So what would happen to Iran’s savings if even the gross income were to grow substantially in future? Its per-capita is expected to grow at 5% CAGR for the 5-years till 2021. Assuming tax is unchanged, any accretion to income would fuel savings or consumption. Now while the country’s savings rate dipped since 2013, it has held at the current level since 2015. Of course, the recovery in oil prices in this period has a lot to do with its savings rate bottoming out. But from the context of consumption behavior, the bottoming of the savings rate may imply the incremental desire towards new-consumption is met. In other words, a rise in gross income in coming years may not disproportionately translate into consumption as occurred between 2013 and 2016. That may exert a northbound pressure on its savings rate!
But the reverse could also occur! With the government working to grow non-oil sectors, a lot of consumption products may hit the market. Lifting of sanctions could bring more products from overseas. The new infrastructure could transport these products quickly and cheaply across the hinterland. With inflation down, it may lead to interest-rate cuts to spur economic activity, which would bring more disposable money in the pocket. Consumption typically moves from staples to discretionaries as an economy matures. As some discretionaries become a compulsive buying-habit, they eat the most into disposable income and savings. This trend has been observed in scores of emerging economies, and Iran may not be any different. The share of consumption within its GDP is marginally less than Thailand, which has a similar per-capita income to Iran. So if consumption picks up, it may exert a southbound pressure on its savings rate!
At the end, while Iran still has a high savings rate despite the recent dip, factors like income growth, inflation, oil prices and access can impact it in coming years. Maintaining a stable savings rate is an imperative to avoid any external borrowings to fuel investments in its non-oil export sectors. The difference effected by the Southeast Asian economies between 1997 and now is an example of balancing investments with savings. On the other hand, some South Asian countries are seeing rising debt as savings fall short of expected investments. Debt can have severe socio-political consequences, apart from its economic implications. Iran needs to balance itself according to its growth priorities!
[All data quoted here are from IMF WEO database]
Image Courtesy: Financial Tribune Iran
Originally published here – https://financialtribune.com/articles/economy-business-and-markets/82559/decoding-iran-s-high-savings-trend