{"id":451342,"date":"2020-11-24T12:52:26","date_gmt":"2020-11-24T10:52:26","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=451342"},"modified":"2020-11-24T12:52:26","modified_gmt":"2020-11-24T10:52:26","slug":"the-reserve-bank-has-just-sent-a-major-warning-about-south-africas-debt","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/banking\/451342\/the-reserve-bank-has-just-sent-a-major-warning-about-south-africas-debt\/","title":{"rendered":"The Reserve Bank has just sent a major warning about South Africa’s debt"},"content":{"rendered":"

The South African Reserve Bank (SARB) has sent out a warning about the sharp rise in public debt and the potential impact it could have on the country’s financial system.<\/p>\n

In a research note published on Tuesday (24 November), the central bank cited Treasury’s October Medium Term Budget Policy Statement which shows that public debt is expected to reach 82% of GDP in the current fiscal year, and to stabilise at 95% in 2026.<\/p>\n

This is a substantial upward revision from the projected stabilisation of debt at 60% of GDP as recently as the 2019 national budget, it said.<\/p>\n

“Budget deficits for the fiscal years ending in 2021 and 2022 are projected at 15.7% and 10.1% of GDP respectively. This places South Africa\u2019s near term public sector funding requirements among the largest of its peers in emerging markets as a share of GDP.<\/p>\n

“Government also faces significant execution risk in stabilising debt, including implementing approximately R300 billion in spending reductions over the next three years relative to the 2020 national budget projection.”<\/p>\n

National Treasury itself has indicated that, if the planned fiscal consolidation is unsuccessful, government could face debt distress with adverse implications for the broader economy.<\/p>\n

Risk to South Africa\u00a0<\/strong><\/p>\n

“The interconnectedness between the financial sector and the sovereign has emerged as a major threat to financial stability in South Africa,” the central bank said.<\/p>\n

The SARB said it has identified four channels through which this threat could play out.<\/p>\n

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1. The first is the sovereign exposure channel, which refers to the fact that domestic financial intermediaries are large holders of sovereign debt.<\/strong><\/p>\n

Domestic banks account for approximately 23% of total government bond holdings, while pension funds together with insurers account for a further 29% of holdings.<\/p>\n

Consequently, the deterioration in public finances has adverse effects on the perceived creditworthiness of financial institutions themselves, the SARB said.<\/p>\n

“This is most clearly demonstrated by the fact that domestic commercial bank credit ratings are currently pegged to that of the sovereign – in part due to the large holdings of government bonds on bank balance sheets.<\/p>\n

“This channel also poses risks to the government because, if domestic financial institutions face stresses which force them to reduce their lending, government may face challenges in funding itself.”<\/p>\n

\"\"<\/a><\/p>\n

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2. The second channel of the nexus refers to government\u2019s role in acting as a ‘backstop’ in the event of financial sector distress.<\/strong><\/p>\n

The SARB said that governments across the world have often acted to support banks or their depositors in the event that a bank faces solvency problems.<\/p>\n

This implicit backstop affects how investors and depositors view risk in the banking sector, it said.<\/p>\n

“However, government\u2019s current financial position may place the credibility of a fiscal backstop to the financial sector in question, with adverse implications for bank funding costs. This could also raise the risk of bank runs and financial contagion if the banking sector faces solvency challenges.<\/p>\n

“Likewise, if government were to provide financial support to a bank, it would put government\u2019s financial position under further strain,” it said.<\/p>\n

The SARB said that this issue is exacerbated by the fact that South Africa does not currently have a deposit insurance framework in place, which increases reliance on the public sector to support depositors in the event of a bank failure.<\/p>\n

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3. Both financial intermediaries and government are affected by, and significantly influence, macroeconomic developmen<\/strong>ts.<\/p>\n

The current economic downturn has placed substantial pressure on the fiscus, creating the need for a growth friendly fiscal consolidation, the SARB said.<\/p>\n

“However, should the financial sector experience stress and be forced to reduce the supply of credit to the economy, this could weigh on economic activity and constrain the tax revenue of government.<\/p>\n

“Thus, the efficacy of a fiscal consolidation will be contingent on the state of the economy and the health of the broader financial sector.<\/p>\n

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4. Government borrowing costs are important reference interest rates in the economy.<\/strong><\/p>\n

Government\u2019s borrowing costs are often referred to as a risk-free rate with other borrowers in domestic capital markets tending to pay a premium over a similar maturity government bond, the SARB said.<\/p>\n

“Therefore, as government\u2019s longer term borrowing costs have remained relatively high – despite recent repo rate reductions – so too have the borrowing costs of private-sector bond issuers.<\/p>\n

The central bank said that elevated risk-free rate may also affect the attractiveness of investments undertaken by firms and investors, as a common approach to estimating the value of an investment is to discount the expected future cash flows from the investment using a market-based interest rate. which is usually linked to the risk-free rate.<\/p>\n

“The higher the interest rate, the lower the future value of a given level of cash flows. Thus, elevated government borrowing costs constrain private investment and raise the overall cost of borrowing in the economy.<\/p>\n

“All four of the aforementioned nexus channels currently pose risks to the financial sector,” the SARB said.<\/p>\n

\n

Read: Capitec launches \u2018scan to pay\u2019 functionality in its app \u2013 including SnapScan and Zapper<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

The South African Reserve Bank (SARB) has warned about the sharp rise in public debt and the potential impact it could have on the country’s financial system.<\/p>\n","protected":false},"author":10,"featured_media":390887,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[961],"tags":[26],"class_list":["post-451342","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-banking","tag-headline"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/451342","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=451342"}],"version-history":[{"count":4,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/451342\/revisions"}],"predecessor-version":[{"id":451368,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/451342\/revisions\/451368"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/390887"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=451342"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=451342"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=451342"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}