Reserve Bank sends lockdown and vaccine warning for South Africa

The South African Reserve Bank (SARB) has warned that Covid-19 continues to pose a significant threat to South Africa’s financial stability and that the pandemic could continue well into 2022.

The comments are included in the bank’s latest Financial Stability Review (FSR), in which it highlights that South Africa’s economy experienced its worst recession in 101 years, contracting by 7%.

This was in large part driven by the pandemic and associated containment measures like lockdown, it said.

“While the virus remains a near-term threat to the economy, longer-term structural effects are also emerging which could persist long after the spread of the disease is contained. These include higher levels of debt and increased inequality. Covid-19 has also had a material impact on the domestic financial sector.

“Banks have experienced an increase in funding cost spreads and a sharp rise in loan defaults, while insurance companies have reported lower profits and rising claims on life insurance policies.”

Meanwhile, certain financial markets became dysfunctional amid the wave of uncertainty linked to the initial spread of the virus in the first half of 2020, it said.

The central bank further warned that there is a risk that the pandemic could continue well into 2022.

“While various advanced economies have successfully vaccinated a large share of their populations, vaccination rates among emerging market and developing economies are lower. Even among its emerging market peers, South Africa has been a laggard, having provided a vaccine to less than 0.5% of its population by mid-April 2021.”

The SARB said that a slow rate of vaccination exposes the country to the risk of a third and possibly fourth wave of infections.

“Furthermore, the potential for the virus to mutate − and for variants to emerge against which current vaccines are less effective − suggests that individual countries may remain at risk of Covid-19 outbreaks until the virus is contained globally.”

Despite these concerns, the SARB said that important mitigating policy measures have been put in place to address this risk.

“The SARB and other financial regulators have undertaken a range of measures to preserve financial stability in the face of the pandemic shock. Moreover, financial institutions began 2020 with high capital and liquidity buffers, which left them well placed to absorb the effects of the initial economic contraction.

“But the virus could persist well into the future and may continue to have a substantial adverse effect on the economy in both the short and medium term.”

Therefore, the residual vulnerability of the financial sector to Covid-19 is regarded as moderate, it said.

Read: Government looking at gatherings and other restrictions as tougher lockdown looms

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Reserve Bank sends lockdown and vaccine warning for South Africa