S. Africa’s Rising Debt Is ‘Major’ Threat to Finance Sector
South Africa’s Rising Debt Is ‘Major’ Threat to Finance Industry
(Bloomberg) -- The deep ties that bind South Africa’s banks and insurers to the government is a key risk to the country’s financial stability, according to the central bank.
“If the planned fiscal consolidation is unsuccessful, government could face debt distress with adverse implications for the broader economy,” the South African Reserve Bank said in a financial stability review report on Tuesday. “The interconnectedness between the financial sector and the sovereign has emerged as a major threat to financial stability in South Africa.”
The National Treasury plans to reduce expenditure by about 300 billion rand ($20 billion) over the next three fiscal years as it targets a primary budget surplus in 2026, when debt is expected to peak at 95.3% of gross domestic product.
But Finance Minister Tito Mboweni’s efforts to reduce a government salary bill that’s surged by 51% since 2008 is facing a backlash from politically influential labor groups. Without an agreement, South Africa could face a sovereign debt crisis.
The risks flagged by the central bank include further deterioration of the creditworthiness of banks and insurers holding sovereign debt and the government’s limited capacity to act as a backstop in the event of financial sector distress.
South Africa descended deeper into junk territory last week when Moody’s Investors Service and Fitch Ratings lowered the country’s credit ratings. With banks capped at the level of the sovereign, the likes of Standard Bank Group Ltd. and FirstRand Ltd. will probably also see their debt assessments deteriorate.
‘Remain Intact’
“While we expect the financial stability to remain intact, I would like to emphasize the need to avoid complacency,” Reserve Bank Governor Lesetja Kganyago said on a conference call. “Indeed, things could get worse before they get better for many financial sector firms.”
Still, the industry is well capitalized, the central bank said. While Covid-19 is likely to remain a primary risk in the near term, the crisis is now shifting to a phase characterized by a transition from liquidity to solvency challenges for households and firms.
“A sharp rise in non-performing loans and insurance policy lapse rates is being experienced by financial institutions,” the Reserve Bank said. “This, in turn, is putting the profitability and capital positions of financial firms under pressure.”
Additional solvency challenges faced by smaller banks that were making losses before the pandemic has increased their risk of failure, it said.
Insurers grappling with how to treat virus-related business-interruption claims faced a net exposure, after reinsurance support, of as much as 55 billion rand, according to a survey by the Prudential Authority cited by the central bank.
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