SA financial stability at risk with high debt, energy crisis, says the SARB
THE SOUTH African Reserve Bank (SARB) has warned that the ongoing energy crisis, coupled with the high level of government debt amid a global economic slowdown, could affect businesses and manifest in a shock to the domestic financial system.
In its Financial Stability Review (FSR), the SARB yesterday said the South African financial system continued to be resilient under highly challenging global and domestic conditions, despite an increase in global systemic risk.
The FSR aims to stimulate debate on pertinent issues of relevance to financial stability.
Since the release of the May 2022 edition of the FSR, concerns over global stagflation and the consequent tightening of financial conditions have materialised, while fears of a global recession have continued to grow.
South Africa has also experienced the worst period of load shedding in history, with 170 days of rolling power cuts this year due to unplanned breakdowns and a maintenance backlog of Eskom’s ageing coal-fired power plants.
SARB’s head of the financial stability department, Dr Nicola Brink, said South Africa remained vulnerable to spillover effects from global events such as the Russia-Ukraine war and evidence of escalating global conflict and geopolitical polarisation.
Domestically, Brink said slow and inequitable domestic economic growth presented an unfavourable operating environment for the financial sector.
“This was exacerbated by increased load shedding during the review period, which had the dual impact of negatively influencing investor sentiment towards South Africa and detrimentally affecting business productivity,” Brink said.
“Insufficient and unreliable electricity supply is likely to threaten the viability of some corporates, especially small and medium-sized enterprises, for the foreseeable future, with losses potentially spilling into the financial sector.”
The FSR also pointed out the impact of the government finances’ weaknesses on the financial sector, despite the better-than-expected fiscal outcomes announced in the October 2022 Medium Term Budget Policy Statement.
South Africa’s gross sovereign debt is projected to be more than R4.7 trillion in the current financial year, at least 69% of gross domestic product, and intends taking a significant portion of Eskom’s R400 billion debt.
These escalating debt levels were flagged by S&P Global and Fitch ratings agencies among reasons they could not upgrade the country’s sovereign credit ratings from sub-investment levels.
“The financial sector’s high level of exposure to government debt continues to pose a risk to domestic financial stability, particularly should there be a shock that leads to further volatility and a sharp repricing in the value of government debt,” the SARB said.