South African Financial Cycle Positive for First Time Since 2016
South African Financial Cycle Up, Though Risks Abound, Bank Says
South Africa’s financial cycle shifted to an upward phase for the first time in five years.
The measure of variables including growth in loans to the private sector, real-estate and equity prices, turned positive in the second quarter, the Pretoria-based South African Reserve Bank said Wednesday in its financial stability review.
“Conditions in financial markets are broadly stable, and large financial institutions have maintained sizable solvency and liquidity buffers,” the central bank said. “Both equity and house prices have moved above their trend levels, which lifted the financial cycle into an upward phase.”
The turnaround adds to data showing South Africa’s economy is set to rebound from its deepest contraction last year in almost three decades. The National Treasury said last month it expects the economy to growth 5.1% in 2021, though the recovery would have been stronger had it not been for deadly riots that erupted in the third quarter and the resumption of rolling electricity blackouts.
With the economy also adjusting to the persistent Covid-19 pandemic, “the recovery remains fragile and uneven, further weighing on future prospects for financial variables,” the central bank said.
The violence in July, the worst civil unrest since the end of White-minority rule, “highlighted the tail risks to social and political stability, which could weigh on fiscal policy in the medium to long term,” the bank said. Stop-start lockdown measures and Covid-19 vaccination rates that “remain well below what is required to reopen the economy fully” pose a threat to output, it said.
The Reserve Bank also warned of longer-term fiscal risk including new waves of Covid-19 infections that could weigh on tax revenue and necessitate more fiscal support for the economy, the prospect of more bailouts for cash-strapped state-owned companies, increased spending on public-sector pay and a lack fiscal consolidation measures that could prompt further credit-rating downgrades.
Potentially Vulnerable
The financial system of Africa’s most-industrialized economy is potentially vulnerable to shifts in global conditions, which include the anticipated unwinding of large-scale asset purchases by central banks in the U.S. and eurozone, and tighter financing conditions that weigh on the value of emerging-market exchange rates such as the rand, it said.
While stress tests suggest the banking sector will remain adequately capitalized in the event of a future shock, investment funds could come under pressure, according to the bank. Should heightened risk aversion lead investors in open-ended funds to redeem their holdings en masse, some funds may struggle to meet redemption demand, it said.
The relationship between South Africa’s financial sector and the state remains a key risk to financial stability, according to the central bank’s report. While the ratio of public debt to gross domestic product was revised down in this month’s budget, that’s largely due to an upward revision to size of the economy and public debt is still set to rise.
“The exposure of domestic financial intermediaries to government remains elevated,” the bank said. “In the banking sector, very little capital is held against sovereign exposures and there is a high degree of exposure concentration relative to other asset classes, particularly among smaller banks. This could leave banks vulnerable if South Africa’s fiscal metrics deteriorated further.”
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