The South African Reserve Bank (SARB) has flagged six micro and macroeconomic challenges, including intensified load shedding, as key risks to domestic financial stability in the short-, medium-, and long-term.
The SARB said yesterday that the sharp repricing in government debt, capital outflows and declining market depth and liquidity, insufficient and unreliable electricity supply, intensification of geopolitical risks, remaining on the Financial Action Task Force (FATF) greylist for longer, as well as further deterioration of household and non-financial corporate (NFC) buffers were the main risks to the country’s financial stability.
SARB’s lead macroprudential specialist, Dr Herco Steyn, said the financial sector’s exposure to government debt increased markedly over the past decade, while at the same time the fiscal position and the credit rating of government debt deteriorated.
Steyn said South Africa's public debt stood at 72.7% of gross domestic product (GDP) in the second quarter of 2023, which was notably above the emerging markets of around 50-60%.
“The increasing borrowing requirement to finance the fiscal deficit would result in a higher than projected gross loan ratio of 72.8% of GDP for the 2023/24 fiscal year.
“High levels of government debt in a high interest rate environment mean high debt service costs. Government's debt service costs have more than doubled since 2008, further crowding out growth supporting expenditure.
“While government debt and debt service costs have been increasing, non-resident investors have continued to gradually reduce the relative holdings of South African government bonds and equities.”
Steyn was speaking at the release of the second edition of the SARB’s Financial Stability Review for 2023.
Steyn also said the impact of an insufficient and unreliable electricity supply had prompted large-scale private sector investment in alternative energy solutions.
He said while the full benefits of these reforms were likely to fully materialise over the next three to five years, some improvement had been noted this year, leading to a slight decrease in this risk from a financial stability perspective.
“New electricity generation projects primarily by the private sector registered with the National Energy Regulator of South Africa have increased to 4 126MW in the year to October 2023, compared with 1 664MW for the entire 2022,” he said.
Risks to the global inflation outlook, according to Steyn, also included the conflict in the Middle East, the ongoing Russia-Ukraine war and the impact of climate change on food prices.
Steyn said energy prices remained a key driver of global inflation and inflation expectations.
“In particular, the recent output cuts by OPEC+ against lower inventories have driven oil prices significantly higher in recent months, which has fuelled a rise in global inflation expectations.
“These developments could lead to a further tightening in global financial conditions and suppress appetite for riskier assets. Should global inflation remain sticky, central banks may continue to keep policy rates high.
“Domestically, higher interest rates could exacerbate emerging pressure on households and NFC debt.”
South Africa’s addition to FATF’s list of high-risk countries in February 2023 required that financial transactions with a South African component were subject to enhanced due diligence.
SARB Governor Lesetja Kganyago said he was confident that they would meet the 2025 deadline to get South Africa off the FATF greylist, notwithstanding the challenges identified in the report, including inability to prosecute financial crimes.
“We have set ourselves a target for 2025, and I think in the most recent further investigation, South Africa demonstrated significant progress in addressing issues that were identified by the FATF,” Kganyago said.
“Yes, there are risks that we might not have addressed all of them by then, but that is our baseline scenario. Our baseline scenario as a country is that it's all hands on deck.
“We are working hard to make sure that we just get ourselves out by addressing all of those concerns that were raised by the FATF.”