THE South African Reserve Bank (SARB) has warned that the domestic financial sector remained vulnerable to international developments such as global stagflation and the spillover effects of the Russia-Ukraine war.
However, the SARB said yesterday that the financial system continued to be resilient under heightened volatility and challenging global and domestic conditions, and that this resilience was expected to be sustained over the forecast period.
SARB lead macro-prudential specialist Dr Herco Steyn said there were persistent underlying vulnerabilities in some areas of the financial sector, which weighed on overall resilience.
Steyn said there were also increasing global concerns about rising inflation and slowing economic growth, together with concerns about faster monetary policy normalisation.
He said this combination of rising policy rates and slowing growth was stoking global stagflation fears.
“Domestically, South Africa remains vulnerable to spillover effects of global events, particularly the Russia-Ukraine war and global stagflation concerns,” Steyn said.
“The most likely channels through which South African financial stability could be impacted are the macro-economic impact of global stagflation, which could contribute to continuing slow and inequitable domestic growth and rising inflation, putting pressure on some sectors of the financial system.”
Steyn said that, in addition, rising oil and food prices could have negative implications for social stability, while heightened volatility in global and domestic financial markets could also weigh on investor sentiment.
However, he said that prudentially regulated domestic financial institutions remained resilient, partly owing to their ability to maintain adequate capital buffers to absorb the impact of shocks.
The SARB assesses the stability of the South African financial system at least every six months and communicates its assessment in the Financial Stability Review.
‘Financial stability’ refers to a financial system that exudes and inspires confidence through its resilience to systemic risks and shocks, and its ongoing ability to efficiently intermediate funds.
Steyn said that an emerging risk to domestic financial stability was the impact of a potential unfavourable outcome of the Financial Action Task Force’s Mutual Evaluation of South Africa.
The Financial Action Task Force (FATF) is an international body that promotes policies and standards for combating money laundering, terrorist financing and the financing of the proliferation of weapons of mass destruction.
In October, the FATF released its mutual evaluation report following its assessment of South Africa’s system for anti-money laundering, counter financing of terrorism and counter financing of proliferation (AML/CFT/CPF).
The report identified significant weaknesses in parts of the country’s AML/CFT/CPF system and gave South Africa 18 months to take remedial steps to address deficiencies identified in the mutual evaluation report.
“Should South Africa fail to demonstrate sufficient progress in remediating the deficiencies identified in the FATF mutual evaluation report by October 2022, it will likely result in South Africa being publicly identified as a jurisdiction that is subjected to increased monitoring by the FATF,” Steyn said.
“This could have wide-reaching consequences for the South African financial system, particularly from a reputational risk perspective,” he said.