South Africa's financial system has been largely protected against global market turmoil and will weather the storm, although threats remain from reduced flows to emerging markets, the central bank said on Thursday.
Analysts say a strict regulatory system, including tough exchange controls, have helped shield the local financial sector from the global credit crisis which has its roots in the United States subprime market. "South African financial institutions have very little direct exposure to subprime-related assets and their balance sheets are likely to remain healthy," the bank said in its latest Financial Stability Review, focusing on the six months to June 2008.
However increasing volatility in financial markets, further repricing of risks and financial assets, increasing cost of funding and possibly reduced flows to emerging markets were threats to the local economy and financial system. The National Treasury on Tuesday cut South Africa's growth forecast for 2008 to 3.7 percent from its previous expectation of 4.0 percent, citing in part a deterioration in the global economic environment.
Portfolio flows, which South Africa needs to finance its current account deficit of 7.3 percent to GDP in the second quarter are showing signs of declining, weighing on the rand. Foreigners have sold 41.66 billion rand ($3.76 billion) worth of local shares, so far this year after buying 61 billion rand worth of stocks over the same period last year.
The rand last traded at 11.57 to the dollar, near a 6-1/2 year low of 11.88 touched on Wednesday. On Thursday the central bank warned that the high level of household indebtedness continued to be a source of vulnerability to South Africa's financial system. "(High household debt) can make the financial sector vulnerable to unexpected shocks and should therefore be monitored closely," it said.
Household debt as a ratio of disposable income was at 76.7 percent in the second quarter, after peaking at 78.2 percent in the first quarter, reflecting pressure on consumers from interest rates that have gone up by 500 basis points between June 2006 and June 2008.
The Reserve Bank said financial markets were highly integrated and contagion risks were clearly more of a reality now for South Africa than before the US financial crisis. "There is consensus, however, that the South African financial system will weather the storm and there is no immediate threat of a crisis of the proportion of that being managed in the US for instance," it said.
Economies in southern Africa continued to perform well, although the political and economic crisis in neighbouring Zimbabwe - where negotiations between the government and the opposition have stalled over cabinet posts - posed a threat to the region. "Zimbabwe is in the midst of a major political and economic crisis, and still presents risks to the stability of the region," it said.