Yesterday, the SARB released its Financial Stability Review (FSR) for the period December 2022 to May 2023. The SARB argues that systemic risks have risen since the last edition of the FSR in November 2022 due to both global and domestic idiosyncratic developments. On the global front, systemic risk has risen due to persistently elevated inflation, worries about the resilience of the global banking system, rising global interest rates and downward revisions to global GDP growth. Meanwhile, domestically, weak GDP growth and structural bottlenecks to economic activity, especially in electricity and transport infrastructure, have raised systemic risks. Notably, through the Financial Sector Contingency Forum, the SARB continues to plan for the ‘improbable but not impossible’ situation of a national electricity grid collapse, with the risk likely rising, albeit from low levels.
The SARB downplays the risk of a Silicon Valley Bank situation in South Africa. The FSR notes that ‘a mitigating factor domestically is that banks with the largest proportion of South African government bond holdings relative to their total assets are not systemically important’. (That said, one could have argued the same point about SVB in the US, in our view). The SARB notes though that the conservatively regulated banks remain resilient as measured by their aggregate ability to maintain ‘adequate capital and liquidity buffers to absorb the impact of shocks’ and despite the global banking sector woes, South Africa’s financial sector continued to function well.
Notably, the SARB added two new risks to its Risk and Vulnerability Matrix (RVM). According to the SARB, ‘the RVM provides a forward-looking assessment of the key risks to financial stability in South Africa over the short, medium and longer term, after taking into consideration mitigating factors.’ In this case, the forecast horizon is ‘until at least May 2024’. The two new risks added are (a) capital outflows and declining market depth and liquidity and (b) secondary sanctions amid heightened geopolitical polarisation. The SARB notes that idiosyncratic domestic factors such as insufficient electricity supply, political instability and grey listing by FATF have exacerbated the first of these two risks. Meanwhile, ‘the risk of secondary or indirect sanctions being imposed on South Africa due to its stance on the Russia-Ukraine war has increased since’ the November edition of the FSR and thus warranted an inclusion in the RVM.
We expect a main budget deficit of R68.4bn in April when the National Treasury releases the data today at 14:00 local time, much higher than the R45.2bn deficit recorded in April 2022. Our projection is in line with the provisional financing data published earlier this month. April is the first month of the fiscal year; therefore, it will be too early to get any clear signal from one month’s data about the outlook for the remainder of the year.
But as we argued in South Africa Quarterly Perspectives: No growth without power (2 May 2023), we see a main budget deficit of 5.2% of GDP in 2023/24 versus the NT’s target of 3.9% due to weak growth on tax receipts and spending pressure from the public sector wage deal.
We believe private sector credit extension growth eased in April. The SARB is scheduled to publish the private sector credit extension data for April today at 8:00 and we believe that growth in bank lending to the private sector slowed further in April amid higher interest rates. We forecast growth slowed for the third successive month to 6.9% y/y in April (Thomson Reuters consensus: 7.3% y/y) from 7.2% in March.
The government will provide an update this afternoon on the Operation Vulindlela (OV) economic reform programme. The Presidency issued a notice yesterday that Minister in the Presidency, Khumbudzo Ntshavheni, will host a media briefing today at 14:00 local time to provide an update on the implementation progress of reforms. OV is a joint initiative between the Presidency and the National Treasury to accelerate reform implementation, mainly focusing on network industries, i.e., electricity, transport, water and digital communications. The government previously committed to providing quarterly progress reports, but its last update was on 15 December last year. At that time, only 7 of the 35 reform goals were completed while 5 were assessed to be on track (see South Africa – Some further progress on economic reforms, 6 January 2023).
Eskom escalates rotational power cuts to Stage 6 in the evenings. Yesterday, Eskom pushed up load shedding to Stage 6 in the evenings, but left it unchanged at Stage 4 during the day. This move comes after the utility had guided that it would implement Stage 5 in the evenings. Eskom blamed the escalation in the intensity of power cuts on the delayed return to service of ten of its generation units. As of yesterday, breakdowns had increased to 18 751MW against a backdrop of rising electricity demand amid the cold winter months. Meanwhile, planned outages amounted to 2 407MW, leaving Eskom’s overall energy availability factor at just 55% of installed capacity.
