CAPE TOWN – Stree testing against a theoretical mass default of debt repayments by stricken state-owned enterprises (SOEs) would hurt the financial sector, but would not destabilise it, Reserve Bank officials said on Thursday.
Speaking during the release of the bi-annual Financial Stability Review (FSR) on Thursday, officials said the South African banking sector was owed around R129 billion by SOEs, which only amounted to 2.1 percent of the gross debt owed to the banks.
Foreign banks had a R104bn exposure to SOE debt. Local governments and municipalities owed financial institutions some R28.8bn.
The release of the report comes at a time of growing public and government concern about spiralling debt at SOEs such as Eskom and SAA, which are struggling to pay their fast escalating debts.
Reserve Bank governor Lesetja Kganyago said that the banking and financial sector had some R5.5trillion in assets, so a theoretical mass default by SOEs would not destabilise the banking system.
However, he emphasised that SOE debt ranks equal to sovereign debt, and it was highly unlikely that the government would ever default on its sovereign debt commitments, as the Constitution mandated that the country had to pay its debt commitments before it could make all other payments.
The Reserve Bank’s latest FSR report found that the financial sector remained stable, liquid, well managed and profitable in the second half of 2019.
However, the sector faced risks associated with the weakening government fiscal position, from potential cyber attacks on financial institutions, weakening global growth, and other abrupt changes in world financial markets.
Also factored into the risk metrics in the review was the impact to the financial sector of South Africa steering towards a greener economy, and the recent acceleration in unsecured household debt.
Kganyago said the rising debt of SOEs in other countries was also becoming a global concern, and “the biggest good news” was South Africa was not alone in sharing these concerns.
He warned, however, that fast escalating debt in South Africa might result in further sovereign credit rating downgrades. Further credit rating downgrades could impact the interest burden of South Africa’s sovereign debt and increase the risk of interest rate increases.
In the longer term, the continuation of the accommodative interest rate policies in developed economies, which had resulted in capital inflows into emerging markets, might present risk to the domestic economy and other emerging markets, because of the increased risks in some sectors and emerging countries that had been taken on by foreign investors, the Reserve Bank said.
Medium-term risks to global growth were skewed towards the downside, even though the current accommodative monetary policies in developed economies had lessened that risk over the short term, the Reserve Bank said.
The small bank sector in South Africa had in the latest review showed signs of improved returns, after being flagged as an area of concern. The bank said South Africa’s corporate debt levels were “historically elevated” - SOEs comprised 39percent of that debt.
The high level of consumer debt, indicated by a deterioration in disposable incomes, an increase in credit extension and a rise in debt to disposable incomes, would pose financial risks for consumers if the trend continued, and households, in general, remained financially vulnerable, the Reserve Bank said.