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2024-01-28 at 18:36 #436926
Nat Quinn
KeymasterSouth African banks playing a dangerous game
Government debt constituted 15% of South African banksâ assets in 2023, a significant increase from the previous 10%. It has reached levels that are of concern to the SA Reserve Bank.
S&P Global Ratings shared the data in its 2024 South African Banking Outlook report, which stated that local banks have been largely immune to the countryâs faltering economy.
It said the top banks, which have been taking on additional government debt, can absorb it thanks to their liquid balance sheets and positive yields in real terms.
Top-tier South African banksâ stand-alone credit profiles (SACPs) remain at âbbb-â, but the âBB-â sovereign rating constrains the issuer credit ratings.
âWe do not rate financial institutions in South Africa above the level of the foreign-currency sovereign ratings,â the agency said.
This is because of the direct and indirect impact that sovereign distress would have on domestic banksâ operations.
âOur ratings on banks will generally move in tandem with the sovereign ratings, but a sovereign upgrade is unlikely in the next 12 months,â it said.
S&P said the South African Reserve Bankâs (SARB) tight monetary stance will likely persist in 2024, benefiting net interest margins.
This is partly supported by banksâ government securities portfolios, which increased in 2023 to about 15% of total assets from a 10% average in past years.
While stocking up on government debt at high returns is attractive to local banks, it increases their risk as it exposes them to the stateâs struggling finances.
The South African Reserve Bankâs biannual health check in November 2023 warned that systemic risk to the countryâs financial stability has remained elevated.
âAs government debt has increased, so has the domestic financial sectorâs exposure to it,â the SARB said in its report.
The main reason is that there has been a big decline in foreign investors buying South African government bonds.
This trend accelerated after South Africa was excluded from the World Government Bond Index in April 2020.
The result is that South African banks have picked up part of the difference, increasing their exposure to government bonds.
It also resulted in South Africa having one of the highest ratios of state-owned enterprise (SOE) debt among emerging markets.
This high level of exposure to government debt by financial institutions not only concerns the Reserve Bank. Many economists have also said it should be closely monitored.
Renowned economist Dawie Roodt said the private sector is going to demand much higher returns on the increasing risk of funding growing state debt.
State debt has already reached record levels and is rising at an alarming rate. This means debt servicing costs now exceed R1 billion per day.
Unless there is significant economic growth or the state drastically cuts spending, the country is heading for financial trouble.
If there is a real risk of the government not meeting its debt repayments, local banks will be reluctant to continue funding the stateâs rising debt.
This, in turn, can cause the South African government to default unless it finds an alternative revenue stream.
Because of the banksâ increased exposure to state debt, such an event can cause a serious disruption to South Africaâs financial system.
source:South African banks playing a dangerous game â Daily Investor
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