THE biggest risk to the South African financial sector was the weak fiscal position and high exposure of the financial sector to government debt, given the rise in sovereign risk premia in vulnerable fiscal circumstances.
This was according to the SA Reserve Bank’s (SARB) latest Financial Stability Review (FSR).
According to the SARB, the state-owned enterprises’ (SOE) share of the value of newly issued non-government bonds on the JSE dropped from 28.5% in 2013 to 11.9% in 2023.
This pointed to the SOE’s inability to raise capital, thus putting additional pressure on the fiscus.
And despite the drawdown in the Gold and Foreign Exchange Contingency Reserve Account, South Africa’s fiscal position remained under pressure from spending demands from SOEs.
“The concern is that government guarantees on SOE debt have increased and a portion of this could be converted to additional government debt. This creates vulnerability in the financial system because increasing borrowing costs for the government increases funding costs across the financial system.
“Furthermore, the financial sector is highly exposed to government debt and a sharp repricing in government debt could cause instability,” the SARB said in the FSR.
The SARB found that South Africa’s capital markets had become shallower and less liquid, as witnessed by the increase in government dominance in the domestic bond market, company delistings on the JSE, and a lower turnover in domestic bond and equity markets.
Various policies and initiatives had been implemented by the SARB to strengthen financial stability, including establishing the Corporation for Deposit Insurance (CODI), effective April 1, 2024, to protect depositors.
The SARB said the banking sector’s non-performing loans (NPLS) for the largest asset classes were at their highest levels in a decade, and well above the average for the past 10 years, which could result in rising credit losses.
The SARB warned that rising credit losses could “reduce bank capital and profitability”. However it noted also that banks had been increasing their provisions faster than credit extension, meaning they should be in a position to absorb a further increase in defaults.
The SARB also conducted stress tests on nine potentially systemic insurers in South Africa and had found that they had “remained adequately capitalised under most of the single factor shocks”.
The exercise further indicated that life insurers were relatively more sensitive to market shocks, while non-life insurers were more vulnerable to increases in claims and credit risk.
Those stress tested were the Old Mutual Life Company of SA, Sanlam Life, Liberty Life, Momentum Metropolitan Life and Hollard Life. The four non-life insurers were Santam, GuardRisk, Hollard and Old Mutual.
Life insurers were relatively more sensitive to market shocks because their assets were mainly long-term investments, bonds and equities.
For non-life insurers, In terms of the climate scenarios, the impact was muted, but it was noted that an increase in these climate change events could pose financial stability risks in future.
The SARB found that, overall, South Africa’s financial system remained resilient during the six months under review, despite political uncertainty heightened by the domestic general elections and the high number of elections globally.
Opportune Investments chief investment officer Chris Logan said that it was excellent news that the SARB in its latest Financial Stability Review had focused on the delistings crisis gripping the JSE, with the SARB noting that “there have been net company delistings every year since 2016”.
The JSE acts as a canary in the coal mine in terms of SA’s economic health, with the SARB noting that some of the main factors behind lower capital market depth and liquidity were SA’s low growth and domestic savings and non-resident selling, he said.
Logan said, “It is also encouraging that the SARB is doing more work on the structural changes in SA’s capital market, which will be shared in future reviews.
“The big problem remains that government had not put supportive policies in place to boost economic growth and the attractiveness of SA as an investment destination. Until this happens it is impossible to see a sustained turnaround in the JSE’s delisting crisis,” he said.
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