The South African Reserve Bank (SARB) has warned in its Financial Stability Review (FSR) that there are still material risks to the country’s financial stability in spite of the improving economic outlook for 2021.
THE SOUTH African Reserve Bank (SARB) has warned in its Financial Stability Review (FSR) that there are still material risks to the country’s financial stability in spite of the improving economic outlook for 2021.
The SARB said that the risks to financial stability related to the durability of the economic recovery.
The bank’s FSR revealed that South Africa’s economic outlook was also highly uncertain and would depend on the pace of the Covid-19 vaccine roll-out.
Despite the economy recovering from the depths of the 2020 recession, activity remained weak in some sectors hardest hit by the Covid-19 pandemic such as tourism.
Also posing a risk to financial stability was the potential for global financial conditions to shift abruptly, as well as to the high and rising level of public debt in South Africa.
The government debt has grown faster than any other sector in South Africa over recent years, rising from below 30 percent of gross domestic product in 2009 to slightly more than 80 percent in March 2021.
“Covid-19 continues to pose a significant threat to financial stability. There is a risk that the pandemic could continue well into 2022,” SARB said.
“High levels of public debt pose a material risk to domestic financial stability. The government’s response to the pandemic, alongside weaker tax revenues, has resulted in a steep increase in public debt.”
In spite of this, the SARB said vulnerabilities were lower in the financial sector due to relatively high solvency and liquidity buffers.
The bank said financial institutions in South Africa remained well capitalised, and the banking sector seemed well placed to withstand near-term challenges.
It said the ability of South Africa’s financial sector to cope with a once-in-a-century recession and severe operational disruptions during 2020 reflected a high degree of resilience.
Asset prices were recovering and banks’ loan default rates appear to be stabilising in line with improving economic activity.
The government plans to speed up its relatively slow vaccination process, with Health Minister Dr Zweli Mkhize promising that more vaccines had been secured.
Investec chief economist Annabel Bishop said the government would take a much more sensible approach on its restrictions to prevent unnecessary damage to the economy. The third wave could be more moderate than the second wave.
“Nevertheless, tighter lockdown restrictions in June are likely,” Bishop said. “But (they) are also likely to be focused on the social side, curfews, alcohol and avoiding any severe economic impact with the economic recovery of likely 3.9 percent presently under way for the year.”
The FNB economics team also warned of risks ahead despite the solid upward trajectory in the business cycle that affirmed expectations of a growth rebound this year.
“Still, risks persist: rising Covid-19 infections; intermittent energy supply and labour market fragilities could derail the uptrend,” FNB said.
– BUSINESS REPORT
