Reserve Bank warns of big risks to South Africa

Escalating geopolitical tensions, persistent inflation, weak fiscal positions, high government debt, rising debt-service costs, financial sector exposure to sovereign debt, and load shedding are some of the key global and domestic risks to South Africa’s financial stability.

This was outlined in the South African Reserve Bank’s (SARB’s) latest Financial Stability Report (FSR) which evaluates the stability of the country’s financial system over the last six months.

It includes the identification and assessment of risks to financial stability for the next 12 months, as well as a summary of actions taken by SARB and financial sector regulators to address risks and vulnerabilities.

“Not only about identifying risks [but] also important to highlight initiatives and factors that increase resilience,” said the Reserve Bank.

Below is a very brief overview of some of the points covered. The full report can be accessed here.

Risks and Vulnerabilities Matrix

The Reserve Bank’s assessment of risks and vulnerabilities is communicated through their Risks and Vulnerabilities Matrix (RVM).

Colours in the RVM represent the residual vulnerability of the financial system to each risk.

If mitigative measures are in effect and the financial system is robust enough to handle shocks without widespread impact, the risk of vulnerability is lower. Conversely, with few or no measures in place, the risk of financial instability increases.

Some of the biggest identified risks:

Global Risk Factors:

“Globally, risk factors that dominated financial markets include intensifying geopolitical tensions over the conflicts in the Middle East and Ukraine, sticky inflation that may require interest rates in advanced economies to remain high for longer than expected and persistent high levels of government debt,” said the SARB.

“The difficulty in pricing in these highly uncertain and often contradicting factors led to heightened market volatility,” it added.

Domestic Risk Factors:

“Domestically, the key risks to the financial stability outlook remain the weak fiscal position, the high levels of government debt, the concomitant increase in government’s debt-service costs and the financial sector’s high exposure to the sovereign,” said the Reserve Bank.

“These factors contribute to increased interconnectedness and concentration in the domestic financial system, in turn inhibiting its capacity to absorb financial shocks and ultimately reducing financial system resilience,” it added.

Going forward

SARB said that the country’s financial system “has remained resilient since the release of the November 2023 FSR despite heightened uncertainty.”

While the South African financial system faces several risks to financial stability, the Reserve Bank says that progress has been made to reduce the vulnerability of the domestic financial system against the key risks highlighted by increasing its robustness.

Key initiatives in this regard include strengthening the financial safety net, mitigating potential systemic events, and enhancing resilience against cyber and climate risks.

Additionally, “prudentially regulated domestic financial institutions, in aggregate, remained resilient,” by maintaining adequate capital and liquidity buffers, ensuring uninterrupted provision of financial services, said the SARB.

Overall, the Reserve Bank expects the financial system to remain resilient and continue functioning effectively through the forecast period to May 2025.

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