The South African Reserve Bank (SARB) has warned that a number of issues could impact the country’s financial stability over the medium term, including another Covid-19 flare up and increasing government debt.
The issues form part of a risk framework included in the central bank’s latest financial stability review, which was published on Wednesday (24 November). The SARB’s risk and vulnerability matrix (RVM) captures the primary risks to financial stability over a medium-term horizon.
These risks are identified using quantitative indicators as well as a qualitative assessment by the SARB.
The below graph depicts the RVM, with each block representing a particular risk. The colour of the block represents the vulnerability of the financial system to the risk after taking mitigating factors into consideration.
Lower vulnerability risks are ones where the financial system is relatively well placed to absorb a shock without a broader spillover of distress across the system. Higher vulnerability risks are ones that are more likely to lead to financial instability if no further mitigating actions are taken.
Covid-19 and vaccinations
The impact of Covid-19 and the measures taken to contain it have exacerbated pre-existing economic and financial vulnerabilities in South Africa, the SARB said.
“GDP growth was relatively weak in the years leading up to 2020, when Covid-19 struck. Following the impact of the pandemic, growth in real GDP fell by 6.4% in 2020, a considerably larger drop than the EM average of 2.2%, reflecting structural weaknesses in the domestic economy and strict lockdown measures. ”
The impact was to a larger extent felt by lower-income individuals, the central bank said.
While vaccination rates in South Africa are slowly increasing, the global experience with Covid -19 suggests that further waves of infection may occur even when a large share of the population is vaccinated, it said.
“This implies that firms in sectors hardest hit by the pandemic, such as tourism, leisure and hospitality, could remain under pressure in the near term.
“As a consequence, insurers may continue to face elevated levels of business interruption claims, and the banking sector may continue to experience higher-than-usual non-performing loans over the coming months.”
The recent unrest could also dent the recovery and may further weigh on investment prospects, the SARB said.
“The domestic economic recovery is being supported by strong commodity exports and commodity prices, and increasing consumption expenditure. However, levels of fixed investment in South Africa have dropped to an 18-year low, which raises questions about the durability of the recovery and the growth potential of the economy over the longer term.”
The bank noted that the unrest has also caused substantial damage to property, which may impact some firms’ ability to generate revenues and service debts, adding to the burden of the ongoing Covid -19 restrictions faced by firms.
“The recent unrest dissipated before becoming a direct financial stability threat. However, in the absence of faster and more equitable growth over the medium term, the risk of further unrest could intensify.”
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Source: Business Tech