South African Reserve Bank. Picture: MARTIN RHODES
South African Reserve Bank. Picture: MARTIN RHODES

The financial sector is resilient enough to overcome the economic shock posed by Covid-19 that has already prompted the country’s banks to restructure loans and introduce payment holidays to help embattled customers, says the SA Reserve Bank. 

The sector is under stress and the Bank warned that it is expecting non-performing loans held by banks and other financial intermediaries to rise in the coming months.

It is also expecting a rise in insurance policy lapse rates, along with increased withdrawals from investment funds.

 “SA’s financial sector is more resilient and it enters this extraordinary period with significant solvency and liquidity buffers in place,” Reserve Bank governor Lesetja Kganyago said on Wednesday at the launch of the Bank’s Financial Stability Review (FSR).

But he said “the financial stability risks are elevated and the outlook is challenging”.

The economic impact of the virus is in its early stages, Kganyago said, and “much remains unclear about the nature and duration of the economic downturn we are experiencing and in turn its impact on the financial sector”.

In its biannual review, the Bank identified the shock of the Covid-19 pandemic — along with further deterioration in already weak macroeconomic conditions and the rising exposure of the banking sector to government debt — as among the main risks to the stability of the local financial sector.  

The Bank regularly assesses the risks to financial stability over the next 12 months, in an effort to mitigate any vulnerabilities in the local banking system.  

Heightened volatility

The pandemic and the ensuing lockdown have already caused heightened volatility in financial markets, “dysfunction” in the government and corporate bond markets, and pushed the country’s banks and insurers to restructure loans and offer premium holidays as consumers come under strain.

The Bank has already taken several steps to ease the pressure on the local financial system, including easing liquidity and capital requirements for banks, to help them lend through the crisis.

It has also eased the rules on how banks account for restructuring loans due to Covid-19, as well as implemented  a R200bn loan guarantee scheme with the Treasury and major banks to help small businesses survive the lockdown.  

Nevertheless, the Bank is expecting impairments to rise, said Kuben Naidoo, CEO of the Bank’s Prudential Authority, which regulates the financial sector.

There will be an increase in impairments, I have no doubt those will be significant,” Naidoo said.

At least one of the big four banks had said it had received 550,000 applications to restructure loans, which reflected “the significant stress out there”. But SA’s banking sector had “not had excess leverage running into the crisis” and was well capitalised when it began, Naidoo said.

He said the bank had only had two weekly drawdowns “of fairly modest amounts” against the R200bn loan guarantee scheme, but he expects these to pick up in the weeks ahead.

Another risk to financial stability was the banking sector’s exposure to government debt, or what is known as the sovereign-bank nexus. 

The banking sector’s sovereign exposures now account for more than 15% of total banking sector assets, having roughly doubled in the past 12 years, according to the Bank.

The state’s already weak fiscal position — marked by rising debt levels and an ever-widening fiscal deficit — is expected to deteriorate sharply in the wake of the pandemic and the ensuing lockdown as tax revenues shrink. Though estimates vary, the government’s deficit is now expected to exceed 10% in 2020, its largest in a century, said the Bank.

“The rising fiscal risks are placing upward pressure on borrowing costs across the economy, potentially exacerbating the adverse effects of Covid-19,” the Bank said in the review.

The capacity of the government to provide a backstop to the banking sector is limited, which could make the sector more vulnerable to contagion, the Bank said.

The fiscal adjustment needed to improve the state’s finances could “impair the economic recovery from Covid-19”.

The banking sovereign nexus is a global problem, said Naidoo. It has in part been driven by the Basel regulatory framework — introduced to shore up banks after the global financial crisis — driving bank appetite for sovereign bonds. In SA, government bonds and some state-owned entity bonds qualify as high-quality liquid assets that banks are required to hold, he said.

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