The Covid-19 pandemic and the lockdowns to contain its spread have had a massive and negative impact on South Africa’s fragile economy. But financial stability — which broadly means the ability of financial institutions to function and maintain credit and other financial services for the economy — remains “intact”.

“Despite a challenging backdrop, financial stability is expected to remain intact. The emergence of the coronavirus (Covid-19) pandemic has dramatically worsened the economic outlook and led to financial market dislocations in the first half of 2020. However, the financial system has continued to function effectively and financial markets have since stabilised,” the Financial Stability Review (FSR) said. 

This edition of the FSR had a big focus on South Africa’s commercial banking sector. The six biggest banks in the land, accounting for more than 90% of the sector’s assets — FNB, Absa, Standard Bank, Nedbank, Investec and Capitec — were subjected to a solvency stress test. 

Three scenarios applied to the exercise: a pre-Covid-19 baseline scenario, a Covid-19 baseline scenario and a stress scenario, the latter sort of taking the form of the pandemic on steroids, with more severe downturns than those already expected. The South African Reserve Bank (SARB) sees the economy contracting 8% this year with pre-Covid levels of output not being reached for at least another three years. 

“South Africa’s systemically important banks are expected to remain adequately capitalised, even in the face of a downside scenario…  even under a more severe macroeconomic downturn than is currently projected, these banks are expected to maintain an aggregate level of capital above the minimum regulatory requirement,” the FSR said. 

It also noted that the banking sector is still in the black. 

“Although there has been a significant decline in operating profit following the lockdown, the banking sector remained profitable as of August 2020. The banking sector’s operating profits have declined sharply following the lockdown in March 2020, to levels last reported eight years ago. In August 2020, operating profits were 44% lower than at the same time in 2019.” 

In that year, the six biggest banks paid R59.5-billion in dividends and R1.6-billion in cash bonuses. Withholding dividends and bonuses “is expected to have a material impact on bank capital levels in 2020”, the FSR said. 

The really big threat to financial stability lies with the government and its ballooning debt. 

“The interconnectedness between the financial sector and the sovereign has emerged as a major threat to financial stability in South Africa,” the FSR said. Public debt is expected to reach 82% of GDP in 2020 and to stabilise at 95% in 2026. A decade of low economic growth and a soaring public sector wage bill to fill the trough of former president Jacob Zuma’s patronage machine — not to mention shoddy governance and outright looting — are ostrich-sized birds coming home to roost.  

The document noted that domestic banks hold 23% of government bond holdings while pension funds have 29%. 

“Consequently, the deterioration in public finances has adverse effects on the perceived creditworthiness of financial institutions themselves… This channel also poses risks to the government because, if domestic financial institutions face stresses which force them to reduce their lending, government may face challenges in funding itself,” the FSR said. 

In short, the financial sector is joined at the hip with the public sector, and the two will go down together. BM/DM