The good and the bad for South Africa heading into 2025

There are many developments which have pointed toward a more favourable environment for South Africa’s financial sector that is expected to continue – however significant risks remain.

This is outlined by the Chief Economist at Momentum Investments Group, Sanisha Packirisamy, in the group’s December 2024 financial stability review.

The South African Reserve Bank (SARB) recently indicated an improved financial stability outlook since June 2024, due to several positive domestic factors.

These factors include an improved fiscal outlook, a decrease in load shedding, lower interest rates, and a more positive sentiment among investors, particularly since the formation of the Government of National Unity (GNU).

In SARB’s November 2024 Financial Stability Review (FSR), a revised approach to illustrating the risks of the financial system was introduced in the new Residual Vulnerability Matrix (RVM).

The RVM maintains six risks, with two removed—tight financial conditions and unreliable electricity supply—and replaced by critical infrastructure failure and increased financial distress for households and small, medium, and micro enterprises (SMMEs).

“Risks that are deemed to pose the highest residual vulnerability to the financial system are escalating global conflicts and remaining on the [Financial Action Task Force] greylist beyond June 2025,” said Packirisamy.

The potential adverse impacts of escalating global conflicts on South Africa’s financial system include:

• Increased volatility and uncertainty in financial markets, leading to a risk-off environment.
• Supply chain disruptions, contribute to inflationary pressures and potentially disrupt the ongoing monetary easing cycle.
• Limited access to broader markets, resulting in higher costs and reduced availability of funding, hedging, and diversification options.
• Increased risk of cyberattacks targeting financial institutions and systems.

For staying on the FATF greylist, this includes:

• Increased compliance costs for financial institutions.
• Restrictions on access to the global financial system.
• Higher funding costs for both public and private sectors.
• Fewer and more expensive hedging opportunities in international markets.
• Potential loss of regulatory equivalence status, affecting South Africa’s financial relationships globally.

Additionally, the financial sector remains exposed to sovereign debt, with concerns growing since the June 2024 FSR.

Other notable risks include critical infrastructure failure, rising financial distress for households and SMMEs, rapid capital outflows due to declining market depth, and the perpetual risks of climate change and pandemics.

Bright sparks

Despite the potential impact of deterioration in these industries on the financial system, the SARB, in collaboration with the Financial Sector Contingency Forum, has been developing contingency plans.

Packirisamy explained that these plans aim to ensure the operational resilience of the domestic financial system in the event of critical national infrastructure failures.

A key initiative involves establishing direct connectivity among crucial nodes in the financial sector to enable a certain level of payment, clearing, and settlement activity to persist even if existing telecommunication networks become non-functional.

Despite rising financial distress among households and SMMEs, the banking sector is seen to remain resilient to credit risk, though some banks may need closer monitoring.

The financial system’s vulnerability to declining market depth has improved, driven by higher domestic asset allocations, a stronger rand, and progress on structural issues.

The supply of high-quality liquid assets (HQLA) is also improving, with increased central bank reserves bolstering liquidity.

The commercial real estate sector faces challenges, however systemic risks to the financial sector remain limited due to reduced bank exposure and stricter lending standards, said Packirisamy.

While government debt still dominates HQLA holdings, the increase in central bank reserves provides more stable and readily available assets, mitigating some of the risks associated with heavy reliance on government debt.

Going forward

Overall, Packirisamy said that that financial stability is “expected to be maintained.”

She said that SARB’s November 2024 FSR underscores “the resilience of South Africa’s financial sector,” as, despite many challenges, the financial system has remained stable since the previous report.

The SARB stresses the need for continued structural reforms and macroeconomic policies to foster sustainable growth and strengthen financial sector resilience.

She notes that while the introduction of a positive cycle-neutral counter-cyclical capital buffer has a marginal impact on lending, it offers significant long-term benefits for financial stability.

“The SARB notes that financial institutions are expected to continue providing financial services without interruptions in the next 12 months,” said Packirisamy.

“A resilient financial sector is important to support economic activity, particularly with increasing momentum on structural reforms and improving business and consumer sentiment,” she added.

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