Climate a growing risk to financial stability, Kganyago says

Reserve Bank governor Lesetja Kganyago has highlighted climate change as one of the key factors that could affect the economy negatively in the coming years, saying it will now play a key part in the Bank’s scenario planning.

He was addressing the Bank’s AGM in Pretoria on Tuesday.

In underscoring some of the risks to financial stability, Kganyago said climate change events were becoming more frequent and more severe. It was evident in the recent winter storms that lashed four provinces and prompted the declaration of regional states of disaster.

As part of the effort to understand and mitigate climate change impacts, climate-related risk would increasingly feature as part of the Bank’s stress-testing scenarios, he said.

Along with climate change, the government’s growing debt levels and higher debt-servicing costs, SA’s greylisting by the Financial Action Task Force (FATF) continued to pose a risk to SA’s economic outlook and financial stability.

“The effects of being greylisted are being felt as foreign counterparties apply greater scrutiny to our domestic institutions,” he said.

The Prudential Authority (PA) and the financial surveillance department are driving the central bank’s efforts to get SA off the greylist.

The FATF has identified 22 action items SA must address to improve its anti-money-laundering processes and to combat terrorism financing. Eight of the 22 items have been addressed, or largely addressed, and 14 remain in progress.

SA had two reporting cycles left — September 2024 and January 2025 — in terms of the action plan, Kganyago said.

“Though foreign counterparties have been applying greater scrutiny to our domestic institutions as a result of the FATF greylisting, the PA has found no immediate negative impact on correspondent banking relationships. It is nevertheless imperative that the action items are addressed timeously to avoid long-term negative effects on the economy,” he said.

Standard Bank CEO Sim Tshabalala, who also addressed the meeting, praised the Bank for the “excellent” work it had done this year to “increase the probability that SA will be removed from the FATF greylist in the course of 2025”.

Kganyago said the PA had supported efforts to grow a more diverse financial industry. It had licensed one bank during the period under review and five more were in progress.

The PA had also registered four new insurers, with a further 11 applications in progress. Two co-operative financial institutions were also registered and two more under way. 

Reflecting on SA’s inflation dynamics, Kganyago said that as with the global trend of moderating inflation SA’s headline inflation decelerated over the past year, falling from 6.9% in 2022 to average 6% in 2023.

But, he said, these annual averages “hide the ongoing volatility in the underlying components of inflation, in turn demonstrating the risks and uncertainty marking the disinflation path”. 

While headline inflation was between 5% and 6% for much of the past year, the Bank’s current forecast showed it easing to 4.9% in 2024. Kganyago said the Bank’s forecast was pulled lower mainly by softening food and fuel inflation.

The Bank held the repo rate steady earlier in July.

“Even with some quantitative and qualitative adjustments to risk perceptions over time, the monetary policy committee has felt it appropriate to maintain the repo rate at 8.25%,” he said.

Given the Bank’s improved inflation outlook for the second half of 2024, many economists now expect the monetary policy committee to lower the repo rate at least one of its two remaining meetings, in September and November.

Update: July 30 2024
This story contains additional comment from Kganyago and comment from Standard Bank CEO Sim Tshabalala.

erasmusd@businesslive.co.za