SA finances could worsen even more, says Reserve Bank

There is a high likelihood that the South African government’s finances will deteriorate further, posing risks to the stability of the country’s financial system, the central bank said.

The worsening fiscal position - caused by higher government debt, weak economic growth and the collection of less tax revenue than expected -- has been exacerbated by the struggling state-owned companies, the Reserve Bank said in its Financial Stability Review report, released in Johannesburg on Thursday. The government has also had to set aside more money to help its debt-laden firms, pushing up contingent liabilities.

The result will be tax increases, lower corporate and household income and investment as well as a protracted period of low economic growth, the central bank said. The financial sector’s profitability will also come under pressure, while also causing credit-rating downgrades that trigger capital outflows and debt that’s more expensive and difficult to issue because of negative investor sentiment.

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Finance Minister Tito Mboweni painted a bleak picture of the nation’s finances in his medium-term budget policy statement last month, with government debt set to soar to 80.9% of gross domestic product by fiscal 2028 unless urgent action is taken. The trajectory is almost 20 percentage points higher than that projected in the February budget and shows no sign of stabilizing. The budget deficit will peak at an 11-year high in 2020-21.

Moody’s Investors Service cut its outlook on the country’s credit rating from stable to negative on November 1. With the country already holding Moody’s lowest investment grade rating, that moved it one step closer to being rated junk by all three major ratings companies.

Other financial stability risks:

• Rising cyber dependency
• Likelihood: Medium
• Impact: Corporate security breaches, disruption of business operating systems, work stoppages, large ransoms, crash of crucial financial infrastructure, high replacement costs

• Weaker global economic growth and spillover to South Africa
• Likelihood: Medium
• Impact: Lower demand for South Africa exports, lower domestic growth, higher unemployment, deteriorating household balance sheets, decline in fixed investment, lower profitability in banking and non-financial corporate sector

• Abrupt, unanticipated changes to global conditions affecting emerging markets
• Likelihood: Low
• Impact: Rapid repricing of risks, volatile capital flows, currency depreciation, lower investment, slower economic growth, slowdown in credit growth, rising unemployment, rising debt and deteriorating asset quality of bank