load shedding eskom rand

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Assessing the risks to South Africa’s financial stability

The Second Edition of the Financial Stability Review (FSR) focuses on risk analysis, forecasting trends which may trip up the local economy within the next 12 months.

load shedding eskom rand

Photo: Pixabay

The South African Reserve Bank (SARB) has published its report which assesses the risks to South Africa’s financial stability.

The Second Edition of the Financial Stability Review (FSR) focuses on risk analysis, forecasting trends which may trip up the local economy within the next 12 months. It’s important to note that financial stability, as a result of mitigating associated risks, is a precursor to sustainable economic growth, development, and employment creation.

The purpose of SARB’s FSR is to identify risks in the hope of creating a better prepared economic buffer.

South Africa’s financial risk assessment

The reality is, as demonstrated by the current technical economic recession, that South Africa’s financial stability is already under fire from both internal and external factors. However, SARB reiterates that without proper risk assessment and management, the local economy could be put under further strain which would inevitably lead to a negative impact on citizens and businesses alike.

As part of its FSR, SARB has identified four major risks which stand to batter the local economy in the short-to-medium term. These risks are ranked according to their propensity for economic destabilisation, explains SARB:

“Potential threats to financial stability are identified and rated according to the likelihood of their occurrence as well as their expected impact on the domestic financial system.

The identified risks are classified as ‘high’, ‘medium’ or ‘low’ in terms of both the likelihood of each risk materialising and its possible impact on financial stability.”

Weaker global economic growth

Weaker global economic growth, defined as an international factor which has the propensity to disrupt the local economy, is called as a medium level threat in terms of likelihood and impact. In its report, SARB points to tension surrounding the global markets, which impacts trade and currency value:

“Risks emanating from escalating trade tensions, generally lower commodity prices, higher bond yields in the United States (US), US dollar appreciation, and spillover effects from economic and market turmoil in Turkey and other vulnerable emerging markets.”

SARB states that global factors could impact South Africa’s export potential as well as increasing funding costs and credit risk of financial and nonfinancial sectors.

Faster than expected tightening of global financial conditions

Another global financial factor, the likelihood of which is regarded as medium, is linked to the US ‘s monetary policy and currency. SARB explained that the risk facing South Africa’s economy is intrinsically linked to the US and that the following factors would have a ‘highly’ negative impact on the South African economy:

“Unanticipated and faster-than-expected tightening in US monetary policy, an accelerated unwinding of the Federal Reserve’s (Fed) balance sheet, further US tax cuts, a misalignment between US fiscal and monetary policy, and continued US dollar liquidity shortages.”

Lower domestic economic growth

A local risk to the economy, which is centred on South Africa’s inability to rebuff the economic recession. SARB rates the likelihood of lower domestic economic growth as high and points to various factors which play a role in the country’s already uneasy financial flight plan:

“Low domestic economic growth owing to a possible weaker global economy and policy uncertainty which would give rise to negative domestic sentiment and confidence levels that could spill over to the financial sector and impact on the asset quality and profitability of banks.”

The FSR points to growing concern regarding the wanton wastage of funds allocated to embattled state owned enterprises. SARB notes that government bailouts are draining the national fiscus at an alarming rate.

Cybersecurity risks

SARB has identified the risk to South Africa’s cybersecurity as high impact, owing to the unpreparedness of many strategic industries. South Africa is behind the curve with regards to its cybersecurity proficiency – this is cause for great concern in a rapidly evolving digital world. The FSR states:

“Cybersecurity risks related to the disruptive impact of breaches that could result in substantial losses for systemically important financial institutions, especially given the increased level of global interconnectedness.”

South Africa’s latest economic growth forecast

As part of the FSR report, SARB reflects on the country’s latest economic growth forecast. The Reserve Bank admits that the local economy is vulnerable and stands to be negatively impacted by growing financial concerns across the board, explaining:

“South Africa’s latest growth forecast, prepared by the SARB, for 2018 has been revised downwards to 0.7% (from 1.2%) and remains unchanged at 1.9% for 2019.

Besides being negatively affected by exogenous risks, domestic growth is also vulnerable to internal risks such as structural weaknesses (high unemployment, a low savings rate, and weak governance of state-owned enterprises (SOEs)), fiscal challenges, and uncertainty around policies such as the proposed expropriation of land without compensation.

Spillover risk to the financial sector as a whole is evident given the contraction of the manufacturing, trade and government sectors in the second quarter of 2018, as well as the exposure of the banking sector to the real economy.”