Filipino households’ savings rate declining, ADB reports

Household savings rates of Filipinos have been declining over the years because of the impact of a growing young population on the economy, the Asian Development Bank (ADB) reported Thursday.

In a study titled “Saving in Asia and Issues for Rebalancing Growth,” the Manila-based lender said the household savings rate has declined over time—from 9.8 percent of gross domestic product (GDP) in 2000 to 1.7 percent in 2006, then rebounded to 2.4 percent of GDP in 2007.

A proxy for economic output, GDP is the total value of goods and services produced in a country in a year.

The ABD said household savings was generally defined as the difference between the household’s disposable income and its consumption expenditures.

“The household savings rate in the Philippines has declined over time owing to the growing proportion of young dependents in the economy. The increase in the young dependency group would have increased the education and health expenditures, which result in lower aggregate saving,” the ADB reported.

“Clearly, the aging of the population has complex effects on household savings, which may reflect family composition rather than individual saving rates,” it added.

The lender said the share of dependent population between age 0 and 15 in 2005 was about 36 percent of total population in the Philippines—close to the South Asian economies’ average and much higher than its neighboring Southeast Asian economies’ average of about 26 percent.

Savings rate stable

Meanwhile, the national savings rate has been stable at around 18 percent of GDP.

Corporate savings in the Philippines has doubled relative to GDP since 2000, but the rate was inadequate to offset the significant decline in household savings as a ratio to GDP.

To improve household savings, the ADB recommended policies such as to increase social transfers, reform pension systems, and provide universal healthcare insurance and education.

“These policies will not only generate short-term demand for education and health services, but also ensure long-term human capital investment, promote lifetime earnings, and create greater economic potential,” ADB explained.

It noted that the higher spending on social safety nets would boost domestic demand by freeing up household resources.

“The effect would be stronger if spenders, including the poorest people, are influenced more than the savers,” ADB added. “Policies to shore up domestic demand should therefore include the poor through targeted transfers. When directed to the poor, such funds will not be saved but will be used to buy goods and services, supporting a broader economy through a multiplier effect.”

The bank also said that increased availability of social security provision and enhanced credit availability could reduce household savings.

“Policies that foster increased social expenditures could play an important role in helping to smooth consumption over the life cycle. This would moderate household saving rates and help in rebalancing growth toward consumption,” ADB added.

From 2000 to 2007, consumption contributes about 4 percent to the economy. Of this, private spending contributes 3.8 percent and 0.2 percent for government consumption.

During the period, the average Philippine growth was 5.1 percent.

The ADB also said policies that could shift household savings toward consumption and channel corporate savings into productive investment would help reduce the existing savings-investment gap in Asia, and thereby lead to a reduction in global imbalances. –Darwin G. Amojelar, Senior Reporter, Manila Times