The South African Reserve Bank warned on Thursday that high household debt was a potential source of vulnerability and the growth in non-performing loans must be closely monitored.
Elevated and volatile oil prices could also impact on economic and financial stability through higher inflation, interest rates and on an already large current-account deficit, it said in a biannual Financial Stability Review.
However, debt service costs remained low, while the domestic financial system was sound, the Reserve Bank added.
Household debt levels are at record levels — 77,6% of disposable income in quarter four of 2007 — and consumer spending is slowing after a series of interest-rate increases over the past two years aimed at taming inflation.
The Reserve Bank has lifted its repo rate by 450 basis points to 11,5% but inflation remains on the up, hitting a more than five-year high of 10,1% year-on-year in March, partly driven rising fuel costs.
It said in the report that debt levels could affect stability, although servicing costs were still relatively low.
”Although the annual growth rate of credit extended to the household sector was still high, households were spending a relatively small fraction of their disposable income to finance debt,” the central bank said.
”The high level of household indebtedness could, however, present a potential source of vulnerability.”
An increase in non-performing loans, and in particular for mortgage loans, needed to be closely monitored.
”Even though households still spend a reasonably low fraction of their disposable income, 10,9%, to finance debt, the deceleration in the annual growth rate of household financial assets could be a cause for concern.”
The annualised growth in non-performing loans grew by 56,4% in 2007 compared with 17,2% the previous year, it said.
South Africa’s residential property market has come off sharply over the past two years, under strain from higher interest rates.
According to the Standard Bank monthly property gauge, annualised house prices contracted for the first time in almost eight years in March.
The central bank said record high oil prices remained a key risk to stability, globally and in South Africa.
”Oil markets are expected to remain tight in 2008 and this could have significant implications for economic and financial stability in South Africa through the potentially damaging effect of higher oil prices on inflation, interest rates, asset prices and the already large current-account deficit,” it said.
The current-account shortfall widened to 7,3% of GDP in 2007, its highest level since 1971.
The bank added the impact of the global credit crisis on South African financial institutions was limited, although persistently high oil prices, a sharp slowdown in the United States, a drop in equity prices and a further weakening of the dollar could further knock global stability. — Reuters