Sanisha Packirisamy, Chief Economist at Momentum Investments Group

• The South African Reserve Bank’s (SARB) assessment of the financial stability outlook has improved since the June 2024 Financial Stability Review (FSR), thanks to domestic factors including an improved fiscal outlook, a decrease in loadshedding, lower interest rates, and more positive sentiment among investors.

• The November FSR introduced a revised approach to illustrating the risks of the financial system in the new Residual Vulnerability Matrix (RVM), previously known as the Risks and Vulnerabilities Matrix (also RVM).

• The number of risks in the RVM was kept at six but with slight changes. Two risks (tight financial conditions for longer and insufficient and unreliable electricity supply) were removed and replaced with critical infrastructure failure (incorporating the deterioration in other network industries) and increased financial distress in households and small, medium, and micro enterprises (SMMEs).

• Risks that are deemed to pose the highest residual vulnerability to the financial system are escalating global conflicts and remaining on the Financial Action Task Force’s (FATF) greylist over the medium term.

• While the fiscal outlook has improved since the June FSR, “several risks” to the fiscal outlook remain.

• A year ago, the SARB announced an increase to the counter-cyclical buffer (CCyB – a tool designed to enhance the resilience of the banking sector by adjusting capital requirements based on the macroeconomic environment) from 0% to 1% because having it at 0% was ineffective. The phase-in period for the positive cycle-neutral (PCN) CCyB will take 12 months from 1 January 2025 with minimal impact on lending and macroeconomic activity.

• Government debt still dominates banks’ high-quality liquid assets (HQLA) holding which is a concern and contributes to financial stability vulnerabilities due to the low credit rating of SA’s government debt. However, there is a positive shift to “more and better liquidity” with the increase in central bank reserves.

• The commercial real estate (CRE) sector continues to face vulnerabilities stemming from both the cost and income sides. Although investors could face significant financial losses during market shocks in the CRE sector, systemic risks to the financial sector are currently limited due to reduced direct bank exposure to the CRE sector.

• The November 2024 FSR highlights the resilience of SA’s financial sector amid various global and domestic challenges. Despite facing risks such as escalating global conflicts, high public sector debt and vulnerabilities in the CRE sector, the financial system remained stable.

• The SARB notes that financial institutions are expected to continue providing financial services without interruptions over the forecast period to November 2025.

You can read the full report here.

ENDS