South Africa’s Rising Debt Is ‘Major’ Threat to Finance Industry

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,” theSouth 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 ofStandard Bank Group Ltd. and FirstRand Ltd. will probably also see their debt assessments deteriorate.

South African Banks to See Limited Fallout from Debt Downgrades

Still, the industry is well capitalized and financial stability is expected to remain intact, 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.”

Smaller banks that were making losses before the pandemic are experiencing increased risk of failure, it said.

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