SA central bank flags inflation as major risk to domestic financial system.
By Lehlohonolo Lehana.
South African Reserve Bank (SARB) says the country remains vulnerable to spillover effects of global events, particularly the Russia-Ukraine war and global stagflation concerns.
Presenting its latest financial stability review on Wednesday (25 May), the central bank noted that the most likely channels through which South African financial stability could be impacted are the macroeconomic impact of global stagflation.
Stagflation is defined as persistently high inflation combined with high unemployment and stagnant demand in a country's economy.
This stagflation could contribute to continuing slow and inequitable domestic growth and rising inflation, putting pressure on some sectors of the financial system, the SARB said.
The Reserve Bank also noted rising oil and food prices which could have negative implications for social stability, while heightened volatility in global and domestic financial markets could also weigh on investor sentiment, it said. South Africa reported its worst
South Africa experienced its worst riots since the end of apartheid in July 2021, with the violence in Gauteng and KwaZulu-Natal claiming 354 lives.
It also led to heavy criticism of president Cyril Ramphosa's government and its ability to respond to major security issues. The perceived lack of response from the government subsequently led to a cabinet reshuffle and the axing of the national police commissioner.
The Reserve Bank added that the localised flooding in KwaZulu-Natal during April 2022 has caused significant damage to infrastructure, with the KwaZulu-Natal provincial government estimating the cost of repair to be in the region of R17 billion.
"The flooding is another shock to the domestic insurance industry that is still recovering from the lingering impact of Covid-19-related claims and the July 2021 unrest," it said.
"The South African financial cycle continues to recover, primarily due to rising house and equity prices, but remains in a downward phase," the Reserve Bank said.
"Although the national state of disaster was lifted in April 2022, South Africa remains vulnerable to the risk of further Covid-19 flare-ups impacting negatively on economic activity."
The Reserve Bank also flagged the 'unprecedentedly low levels of liquidity' in the South African government bond (SAGB) market since the start of the Covid-19 pandemic.
"Although the SARB has taken various steps to restore and maintain smooth market functioning since the onset of the COVID-19-induced shock, the decline in SAGB market liquidity has prevailed beyond the initial shock.
"Should such illiquidity persist, it could make the domestic financial system vulnerable to high volatility, sharp price adjustments and an increased cost of funding."
When considered alongside the bank-sovereign nexus, as discussed in detail in the first edition of the 2021 FSR, liquidity in the SAGB market will be the subject of closer monitoring from a financial stability perspective going forward.