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The South African Reserve Bank’s (SARB’s) Financial Stability Review (FSR) for 2023 has flagged nine key risks to the country’s economy, including two entirely new risks that have only emerged in recent months.
The two new risks are the risk of US sanctions – as highlighted in reports this week – as well as the possibility of greater capital outflows.
The risk of US sanctions is notable in that if it materialises, the SARB warned that this could trigger a financial crisis in South Africa.
Load-shedding also features prominently among the risks, with the central bank highlighting, amongst other things, that a worsening in the energy crisis could disturb financial system infrastructure.
Economists at Nedbank highlighted the risks to the domestic financial system, noting that each carries short-, medium- and long-term impacts which could disrupt the local economy.
Broadly, the nine risks are:
- Insufficient and unreliable electricity supply
- Sharp repricing in government debt
- Higher interest rates for longer
- Remaining on the Financial Action Task Force (FATF) greylisting for an extended period
- Slow and inequitable domestic growth
- Financial sector underprepared for climate change risk
- Successful systemic cyberattack
- Capital outflows and declining market depth and liquidity
- Secondary sanctions amid heightened geopolitical polarisation
The SARB’s review of the risks shows that not every factor carries the same weight, and each has a different level of likelihood.
For example, South Africa being hit with insufficient and unreliable power supply carried a high likelihood of occurring – indeed, it is currently the reality – but its impact is only over the short and medium term, given the mitigation efforts underway. Despite this, it carries a high degree of vulnerability in the local economy.
Conversely, the financial sector being unprepared for climate change carries lower vulnerability, has a lower likelihood of occurring, and also a longer-term impact.
According to Nedbank, the two new risk factors in play – the geopolitical risks and capital outflow risks – are the most notable.
Capital outflows and declining market depth and liquidity
The group said that risks associated with sustained capital outflows, declining market depth and liquidity have been outlined in previous versions of the FSR.
This time around, however, the focus is on how the risk may interact with other vulnerabilities and potentially destabilise the domestic financial system.
“The SARB states that the recent turmoil in the US banking sector demonstrated how vulnerabilities related to unhedged interest rate risks, concentrated exposures to the sovereign, and an undiversified depositor base may interact to drain liquidity and eventually result in solvency challenges for banks.
While the SARB noted that these risks are not unique to South Africa, with several emerging markets facing the same challenge, domestic factors like the greylisting by the FATF,
electricity supply challenges and political instability, exacerbate these risks.
According to Nebank, if these concerns were to materialise, the potential consequences include:
- A sustained decrease in the value of South African government bonds held by non-residents, which would cause greater concentration within the domestic financial system.
- Disruption of the government bond market, potentially requiring repeated episodes of support by authorities.
- Less diversified capital markets ecosystem, which reduces the financial system’s ability to absorb systemic shocks.
- A decrease in the exchange value of the rand if foreign investor appetite wanes and commodity prices decline.
- A potential interaction with the high exposure of the financial sector to government debt.
Secondary sanctions
A newer, but critical risk identified by the SARB is that of possible direct or indirect sanctions against South Africa.
“This risk comes off the back of the US accusations that South Africa sold arms to Russia in support of the Kremlin’s war against Ukraine. The allegations and the South African government’s defensive stance have raised concerns about whether the country is genuinely neutral in its position, thus fuelling tensions with the US,” Nedbank said.
The financial stability impact will be significant should this risk materialise. The SARB said that, at worst, it could trigger a systemic event.
- The potential consequences attached to this risk include:
- A significant disruption to the SA financial system, given that it will not be able to make international payments in USD.
- Loss of correspondent banking relationships and more intensive scrutiny of South African financial institutions by foreign counterparties, even in the absence of formal secondary sanctions.
- A sudden stop to capital inflows and increased outflows.
Nedbank noted that, in addition to the financial stability implications, the trade risks are just as significant given the country’s strong links with the US. The US accounts for about 9.7% of the country’s total export revenue, while Russia contributes a tiny 0.3%.
Financial system stable
Despite adding more risks into the mix, the SARB noted that, overall, financial institutions remain resilient and adequately capitalised, with sufficient liquidity buffers to absorb the impact of shocks.
“The financial system is still resilient despite the global banking sector turmoil and resulting volatility. However, slower unequal growth will likely weigh on the system’s resilience beyond the forecast period,” Nedbank said.
Read: The Reserve Bank prepares for grid collapse
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