The SA Reserve Bank on Wednesday said that the rising cost of living could lead to episodes of social unrest as food and fuel prices, as well as the level of household debt remain high.
In its latest Financial Stability Review, the Reserve Bank said rising interest rates would lead to higher debt servicing costs and add pressure to household balance sheets, especially for those is the low-income bracket, as they tended to have higher levels of debt.
“The continuation of slow and inequitable economic growth, coupled with the disproportionately larger impact of increasing food and transport costs on lower-income earners who typically spend between 40% and 45% of their income on these items, increases the likelihood of further episodes of social unrest.
This comes against the backdrop of significant downside risks to economic growth, and notable rising global inflation and interest rates. The country was battling elevated levels of unemployment, skyrocketing food and fuel costs, as well as load shedding, the bank said.
Global stagflation and tightening financial conditions are some of the risks faced by the country’s financial system. The bank said the recent geopolitical issues in Europe, Including Russia’s invasion of Ukraine, were what caused the main shocks to the global financial system, leading to further disruptions to global supply chains, creating concerns about food security, among other things.
The threat of rising interest rates to slow increasing headline inflation resulted in uncertainty and volatility in global markets.
The Reserve Bank added that sanctions imposed on Russia could negatively affect emerging markets more broadly.
“Spillovers from Russia’s war in Ukraine hold negative implications for global financial stability, primarily by exacerbating financial market uncertainty and volatility against the macroeconomic backdrop of the slowing of an already tentative global economic recovery from the Covid-19 pandemic; and sustaining elevated inflation and inflation expectations over a longer time frame,” the bank said.
The Reserve Bank said South African financial institutions had restricted direct exposure to Russia and Ukraine, but the war could affect the country’s financial stability as growth and inflation go in the wrong direction, adding that uncertainty weighed on global and domestic investor sentiment.
“Although, the potential impact is ameliorated to some degree due to the combination of inflation and inflation expectations that are still moderate compared to other emerging markets and advanced economies,
“[There is] a relatively strong and stable currency supported by strong exports and high commodity prices and an improved fiscal outlook as reflected in the 2022 budget speech.”
The global financial system was exposed to rising global debt levels, with countries like Sri Lanka defaulting on debt repayments for the first time in its history. The country is dealing with its worst financial crisis in more than 70 years. Markets viewed this as indicative of potential defaults across debt-burdened emerging economies.
The bank said 80% of the increase in global debt levels came from emerging economies.
“Total public and private sector debt grew sharply since the onset of the Covid-19 pandemic by $33 trillion in 2020 and $10 trillion in 2021, reaching a new record high of $303 trillion [R4.7 quadrillion] at the end of last year. The global debt-to-GDP ratio moderated modestly from a historic high of 360% in 2020 to 351% in 2021, but remains some 28 percentage points above pre-pandemic levels.”
In South Africa, government’s debt was expected to stabilise at 75% of GDP in the medium term, a downward revision from 83.5% projected previously.
The Reserve Bank said government debt levels and committed expenditure items still posed a risk to domestic debt sustainability. It said the slow and inequitable recovery from the pandemic put pressure on government to continue its social spending programme. It said:
The recent “decline in the liquidity of the government bond market, if it persists, could make the financial system vulnerable to high volatility, sharp price adjustments and an increased cost of funding for both government and private sector companies”.