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Pretoria - South Africa's deteriorating fiscal position has been identified as a high risk factor to the country's financial stability, according to the SA Reserve Bank’s latest Financial Stability Review.
The SARB released its review on Thursday afternoon. One of the bank's functions is to protect and enhance financial stability in the country.
In its review, which has been published semi-annually since 2004, the SARB said that lower-than-expected tax revenue collection, coupled with the rising contingent liabilities of state-owned enterprises (SOEs) were contributing to SA's poor fiscal position.
Finance Minister Malusi Gigaba's announced in his maiden mini budget in October that National Treasury expects a tax revenue shortfall of R50.8bn for 2017/18.
Poor domestic growth is expected to weigh down personal income tax and corporate tax collections further, the Reserve Bank reported. SA government debt was also growing, and Treasury has revised the current account deficit from 3.1% of GDP to 4.3%.
Government debt is projected to reach near 60% of GDP by 2020/21, or R3.4trn in total. “The containment of public debt and the narrowing of the budget deficit remains a focus area for government. Fiscal consolidation continues to face mounting obstacles,” the SARB said.
Risky SOEs
According to the review, Treasury said that the R700bn debt of SOEs attracted interest of R51bn in the previous financial year. “Most of the entities would not be viable entities without government support,” the SARB said. Overall guarantees to SOEs are expected to remain at 10% of GDP.
The bank pointed out that many SOEs continue to report weak financial results due to operational inefficiencies, weak corporate governance structures and poor procurement practices.
As the financial position of SOEs deteriorate, the likelihood they would default on their debt obligations increased, the SARB said. Defaults would negatively impact government finances and financial institutions exposed to these enterprises.
“Fiscal slippage and the impact of SOEs’ underperformance on the government’s balance sheet pose a significant risk of further sovereign credit ratings downgrades,” the SARB noted.
Global geopolitical events, such as Brexit and concerns around North Korea, meanwhile, were among the other financial risks to identified by the SARB.
Economic outlook
The SARB in September revised its projection for SA GDP growth from 0.5% to 0.6%. Its forecast for 2018 is growth of 1.2%, increasing to 1.5% for 2019.
The review states that low growth impacts financial stability as it leads to a higher unemployment rate and the reduced ability of households and businesses to service debts with financial institutions. It also impacts the profitability of banks and insurers.
The banks said that increasing poverty meant household indebtedness remained a concern.
The SARB warned that extended periods of low growth and the resulting social hardships could negatively affect SA's political stability, and complicate agreements on policy necessary to kick start an economic recovery. This, in turn, would add risk to the a downgrade of SA's sovereign credit rating.
This view is broadly shared by the International Monetary Fund (IMF), who in a statement on Wednesday noted that "increasing domestic political uncertainty" in SA was was contributing to a challenging economic outlook.
SA banks ‘healthy’
The review found that South African banks on the whole remained “healthy and well capitalised”. But the SARB noted that credit defaults had increased in the first half of 2017.
“There appears to be credit stress in retail loan categories of the smaller banks," it said.
Assets in the pension and provident fund industry had also increased at a slower pace. As for the long-term insurance industry, its financial position remained “favourable” and capitalised, but profitability has been impacted negatively by the subdued performance of the SA equity market, according to the review.
“Overall, regardless of some of the headwinds from low domestic economic growth, a deteriorating fiscal position and challenging current political environment, the financial sector is assessed as strong and stable,” the SARB said.
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