It may take up to five years for the economy to recover to where it was before the Covid 19 pandemic, the Reserve Bank says.
The central bank says the pandemic is still in its early stages in South Africa. Just as it has not yet reached a peak, its impact on the country’s economy cannot be estimated with certainty at all.
That’s the message from Reserve Bank President Lesetja Kganyago on Wednesday with the release of the bank’s report on financial stability.
This report is issued twice a year.
Kganyago says that just as the spread of the virus needs to be carefully monitored, its impact on the economy, and especially on the financial system, must also be closely watched to ensure stability.
Kganyago says that while the economy is under tremendous pressure, the country’s financial sector is still liquid and resilient.
“But let me make it clear: There are increased risks that threaten financial stability, and the outlook is challenging,” he says.
The Reserve Bank’s Alex Smith, who discussed the report, says although the pandemic puts a lot of pressure on the financial sector, it remains resilient.
Still, he warns it could take up to five years for the economy to recover to where it was before the pandemic.
Smith says the big risks that the pandemic brings for banks are that many individuals and businesses that owe money will stop paying installments, that monthly insurance policy premiums will not be paid, and that people will probably withdraw money from investments.
“Financial firms’ profitability is likely to decline as a result of the Covid 19 pandemic,” Smith warns.
Apart from concerns about the impact of obvious challenges such as slow economic growth and unemployment on the stability of banks and other financial institutions, the growing growth in government debt is a further threat.
Smith explains that with the state that owes the financial sector the most money, public debt always plays a role in how stable the financial sector is.
Smith points out that even before the pandemic, public debt was expected to grow significantly. The expectation is now that it will rise even more.
It is precisely because of this increase that all three major credit ratings have already downgraded the country’s debt to junk, or well below investment level.
Impose measures to protect
The Reserve Bank says it would not hesitate to impose further measures should it be necessary to protect the stability of the sector.
Kganyago says one such measure is to look at which reserves should be kept.
Kuben Naidoo, one of the Reserve Bank’s deputy presidents and CEO, who oversees banks, says in times of crisis like now, banks need to support individuals and companies.
“You can’t say now that banks have to hold on to money, that’s what they have to help right now,” he says.
He also reiterated that the financial sector has entered the crisis well, and that the sector will be able to withstand this crisis.
Naidoo says the only concern is that if the pandemic lasts for a very long time and puts pressure on the economy for a long time, what the pressure will be on banks.
“But then any financial system will be under pressure,” he says.