SA Reserve Bank Financial Stability Forum: Interest rates are at or near their peaks

High energy prices and on-going geopolitical tensions threaten interest rates. Picture: Pexels

High energy prices and on-going geopolitical tensions threaten interest rates. Picture: Pexels

Published Nov 30, 2023


The second edition of the South African Reserve Bank’s (SARB) Financial Stability Forum was released on November 29.

SARB’s governor, Lesetja Kganyago, said that the forum allows for the unpacking of how global and domestic economic developments affect the domestic financial sector.

“The latest global financial stability report of the International Monetary Fund (IMF) notes that the possible spread of stress in the US’ and European banking sectors in the first quarter of 2023 has eased,” Kganyago said.

Patience, moderation and an easing in financial conditions globally are core themes in the second half of the year.”

The lead macroprudential specialist at SARB, Dr Herco Steyn presented the key findings.

“Delivering on the SARB’s financial stability mandate does not mean that all shocks will be prevented, but rather that the financial system is sufficiently resilient to absorb the impacts of shocks,” he said.

Key global developments:

Steyn stated that yields on 10-year government bonds in advanced economies have increased significantly since May 2023, given the lingering inflation concerns and expectations of high policy rates for longer.

“This makes emerging market government bonds relatively less attractive. Financial markets seem to have adjusted to a new environment characterised by high interest rates in advanced economies, differences in economic growth trajectories across jurisdictions, and constrained fiscal factors globally,” Steyn said.

“These factors combine to reduce yield differentials between advanced and emerging economies, dampening investor appetite for emerging market sovereign debt.”

Another indicator suggests that interest rates are at or near their peaks, but there are factors that can undermine the moderation of global inflation. These could be high energy prices and on-going geo-political tensions.

Risks to global financial stability:

– Geopolitical tensions.

– Geopolitical fragmentation and implications of ‘nearshoring/friendshoring’ (the practice of transferring a business operation to a nearby country, especially in preference to a more distant one).

– Policy rate divergence and associated implications.

– Inflation surprises.

– Slower-than-expected Chinese recovery

– Concerns over the commercial real estate sector in the US and China.

Key domestic developments

“As commodity prices eased from post-pandemic highs, South African tax revenue was below projections. Combined with high government spending, this led to faster than expected growth in government debt this year,” said the financial expert.

South Africa’s public debt stood at 72.7% of the gross domestic product (GDP) in the second quarter of 2023, which is higher than the emerging market average of around 50%.

The higher levels of government debt also spell higher debt-service costs. “Government’s debt costs have more than doubled since 2008.”

The SARB highlighted that while government debt and debt-service costs have been increasing, non-resident investors have continued to gradually reduce their relative holdings of South African government bonds (SAGBs) and equities.

South African capital markets have continued to record portfolio outflows.

“The equity market has suffered the most net outflows as foreign appetite for domestic equity has been weighed down by low growth expectations, heightened exchange-rate risks, and idiosyncratic factors such as greylisting and load shedding.”

Growth in bank holdings of government bonds has far outpaced total assets.

The proportion of risk-weighed assets declined from around 52% in 2019 to 46% currently.

SARB Risk and Vulnerability Matrix (RVM)

The RVM is a forward-looking assessment of the key risks to financial stability in South Africa over the short, medium, and long term.

– Key risks are identified based on the current conjuncture, and take into account possible future developments and the vulnerability of the financial system to such developments.

– After considering existing mitigating factors and policy actions, the residual vulnerability of the financial system is identified for each risk.

RVM: Country-specific risks

– Sharp repricing in government debt.

– Capital outflows and declining market depth and liquidity.

– Insufficient and unreliable electricity supply.

– Remaining on the FATF greylist for longer.

– Persistent structural growth impediments.

– Further deterioration of household and NFC buffers.

Areas that led to a reduction in systemic risk: a significant reduction in the danger of secondary sanctions being imposed on South Africa; promising developments on the likely alleviation of electricity-supply constraints in 2024 and beyond; decreased worry of global banking stress in March 2023

Initiatives and policy actions by the SARB to enhance financial stability

A positive cycle-neutral (PCN) countercyclical capital buffer (CCyB) of 1% would be implemented in South Africa:

“The phase-in period for implementing the 1% CCyB will commence on January 1, 2025 for 12 months, and is to be fully implemented by December 31, 2025.”