Sunday, January 16

Positive South African financial cycle for the first time since 2016

South Africa’s financial cycle went into an upward phase for the first time in five years.

The measure of variables, including growth in private sector loans, property and equity prices, turned positive in the second quarter, the Pretoria-based Reserve Bank of South Africa said on Wednesday in its financial stability review.

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“Conditions in financial markets are generally stable and large financial institutions have maintained large solvency and liquidity reserves,” the central bank said. “Both equity and house prices have moved above their trend levels, pushing the financial cycle into an upward phase.”

The change adds to data showing that South Africa’s economy will rebound from its deepest contraction last year in nearly three decades. The National Treasury said last month that it expects the economy to grow 5.1% in 2021, although the recovery would have been stronger had it not been for the deadly riots that erupted in the third quarter and the resumption of continued blackouts in electricity.

With the economy also adjusting to the persistent Covid-19 pandemic, “the recovery remains fragile and uneven, which weighs even more on future prospects for financial variables,” the central bank said.

The July violence, the worst civil unrest since the end of the white minority government, “highlighted the tail risks to social and political stability, which could weigh on fiscal policy in the medium and long term,” the bank said. . Start-stop lockdown measures and Covid-19 vaccination rates that “remain well below what is required to fully reopen the economy” pose a threat to production, he said.

The Reserve Bank also warned of longer-term fiscal risk, including new waves of Covid-19 infections that could affect tax revenues and require more fiscal support for the economy, the prospect of more bailouts for state-owned companies with liquidity problems, increased spending on public sector remuneration and the lack of fiscal consolidation measures that could lead to further downgrades of the credit rating.

Potentially vulnerable

The financial system of Africa’s most industrialized economy is potentially vulnerable to changes in global conditions, including the anticipated reversal of large-scale asset purchases by central banks in the US and the eurozone, and stricter financing conditions that weigh on the value of emerging economies. market exchange rates like the rand, he said.

While the stress tests suggest that the banking sector will remain adequately capitalized in the event of a future shock, mutual funds could come under pressure, according to the bank. If increased risk aversion prompts investors in equity funds to redeem their holdings en masse, some funds may struggle to meet the demand for bailout, he said.

The relationship between South Africa’s financial sector and the state remains a key risk to financial stability, according to the central bank report. While the ratio of public debt to gross domestic product was revised down in this month’s budget, that is largely due to an upward revision in the size of the economy, and public debt will still rise.

“The exposure of domestic financial intermediaries to the government remains high,” the bank said. “In the banking sector, very little capital is held against sovereign exposures and there is a high degree of concentration of exposure relative to other asset classes, particularly among smaller banks. This could leave banks vulnerable if South Africa’s fiscal metrics deteriorate further. ”

© 2021 Bloomberg

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