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The deep ties that unite SA’s banks and insurance companies with the government are a key risk to the country’s financial stability, according to SA’s Banco de Reserva.
“If the planned fiscal consolidation is unsuccessful, the government could face debt problems with adverse implications for the economy as a whole,” the central bank said in a financial stability review report on Tuesday.
“The interconnection between the financial sector and the sovereign has become a major threat to financial stability in South Africa.”
The Treasury plans to cut spending by around R300bn 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 GDP.
But efforts by Finance Minister Tito Mboweni to cut a government wage bill that has risen by 51% since 2008 is facing a backlash from politically influential labor groups. Without an agreement, SA could face a sovereign debt crisis.
Risks identified by the central bank include a further deterioration in the credit quality of banks and insurers that hold sovereign debt and the government’s limited ability to act as backup in the event of financial sector difficulties.
SA went 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 sovereign level, companies like Standard Bank and FirstRand will likely see their debt assessments deteriorate as well.
Still, the industry is well capitalized and financial stability is expected to remain intact, the Bank said. While Covid-19 is likely to remain a major risk in the short term, the crisis is now moving into a phase characterized by a transition from liquidity to solvency challenges for households and businesses.
“Financial institutions are experiencing a sharp increase in delinquent loans and maturity rates on insurance policies,” said the Reserve Bank.
“This, in turn, is putting pressure on the profitability and capital position of finance companies.”
Smaller banks that were taking losses before the pandemic are experiencing a higher risk of bankruptcy, he said.
Bloomberg
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