Despite heightened uncertainty caused by the elections (above), South Africa’s financial system has remained resilient. (Delwyn Verasamy/M&G)
Despite heightened uncertainty caused by the elections, South Africa’s financial system has remained resilient.
That said, according to the South African Reserve Bank’s Financial Stability Review — released on Wednesday afternoon — the risk of election-related volatility remains because more than 70 countries head to the polls in 2024.
The report, which gives an assessment of the risks to domestic financial stability, further notes that ongoing uncertainty associated with simmering geopolitical tensions overseas is also likely to weigh on investor sentiment, resulting in volatile capital flows and asset prices.
“[A]n upsurge in nationalism and populism across the world and increased polarisation around the conflicts in Ukraine and Middle East as well as around the US-China relationship may have unintended consequences in terms of capital flows, trade relations and access to international financial markets,” it states.
The outcome of South Africa’s elections last week — which saw the ANC’s vote share dip well below 50% — has opened the door to coalition talks, raising uncertainty over what the country’s government will look like over the next five years.
The rand’s performance has been volatile in the election’s aftermath, weakening to R18.93 to the United States dollar on Wednesday. South Africa’s 10-year government bond yield was slightly below 10.9%, down from one-month lows of 10.96% two days after the vote.
According to the Financial Stability Review, South Africa’s financial system is highly exposed to government debt. This is as government bonds comprise a high and growing proportion of financial institutions’ balance sheets, inhibiting the domestic financial system’s capacity to absorb shocks.
The Reserve Bank’s Risks and Vulnerabilities Matrix has assessed South Africa’s weak fiscal position and the so-called “sovereign-financial sector nexus” as posing a high threat to the country’s financial system.
Other risks to the financial system include load-shedding and the prospect of South Africa remaining greylisted.
The review marks climate change as a “perpetual risk”, posing a continuous threat to financial stability.
“Climate change continues to contribute to a growing number of extreme weather events in South Africa, both in terms of frequency and severity,” it notes.
“Such events dominated the domestic insurance industry’s claims statistics in 2022 and 2023. Among other implications, these climate-related changes have exposed insurers to a periodic increase in the number of weather-related claims, heightened reinsurance premiums and increased premiums for consumers.”
Just this week, insurance company Santam said it had received more than 250 claims in the wake of extreme weather conditions in the Eastern Cape.
“At this stage it is difficult to indicate the total amount of these claims. We are still assessing the claims. More importantly, we expect the claims to increase in the coming days, as residents commence with mopping up operations,” the insurer said in a statement on Tuesday.