Hilary Joffe Editor-at-large
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The highest risks to SA’s financial stability are its deteriorating public finances and rising government guarantees to state-owned enterprises (SOEs), says the South African Reserve Bank.

In its latest financial stability review, released on Thursday, the Bank says that defaults by SOEs on their debt obligations could hit both government finances and other financial institutions exposed to these enterprises. The comment, which comes after South African Airways (SAA) had to be bailed out by the government to stop it defaulting on loans and triggering defaults across the SOE sector, came as a reminder that the SOEs have increasingly become not just a fiscal and ratings threat, but could put SA’s whole financial system at risk.

The Bank also flags the risk of a "sudden stop" in foreign investors’ appetite for local bonds if SA were to have its credit ratings downgraded, and says that SA may be particularly vulnerable if there is a significant global, financial market correction.

The Bank’s concerns about the financial stability risks posed by SA’s weak fiscal position and weak SOEs come after the International Monetary Fund (IMF), on Wednesday, urged the presidential fiscal committee to urgently approve fiscal measures to avoid undue increases in government’s debt to GDP ratio and to "signal the political will to tackle long-standing issues that have led to deteriorating market sentiment".

The Bank said, "The contingent liabilities of government are becoming more of a concern as SOEs either fail to raise new capital in the market or fail to roll over existing debt." It noted that the debt of SA’s SOEs was about R700bn and attracted interest of R51bn, and "most of these entities would not be viable entities without government support".

Although the total amount of guarantees the government had made available to SOEs had not increased much over the past four years, the government’s actual exposure had jumped from about 45% to 65%, with exposure to Eskom climbing from 36% of the guarantee facility of R350bn to 62% over the period — and the Bank noted the amount could be even larger if the R200bn in guarantees for renewable-energy, independent power producers (IPPs) were included. The guarantees to IPPs would be activated if Eskom were unable to meet its obligations to purchase the power the IPPs produce.

The review also noted the increase in government debt, because of expected revenue shortfalls, saying that "fiscal consolidation continues to face mounting obstacles".

However, it emphasised that SA’s banks remained healthy and well-capitalised and that SA’s financial system was assessed as "strong and stable" despite global uncertainties and regardless of "some headwinds from low domestic growth, a deteriorating fiscal position and challenging current political environment".

According to the review, banks’ profitability had, however, declined and credit defaults continued to increase in the first half of 2017, and rising household indebtedness remained a concern for financial stability.

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