The South African Reserve Bank says SA's financial system is under stress and headed for "extraordinary shocks", as people are expected to struggle servicing their debt or keep their insurance policies in place, while those who still have money to save and invest are already opting for short-term deposits.
In its 2020 edition of the Financial Stability Review report, the Bank said due to coronavirus-related market turmoil in late February and March, banks are already counting losses from the decline of their financial asset prices.
The JSE All-Share Index already lost 12% in the first four months of 2020, but the JSE Financials Index in which banks, insurance and investment firms fall under was more severely bruised, falling 32% by the end of April. Now, the financial sector is expected to grapple with more chaos as people lose jobs and household incomes are stretched.
Alex Smith, lead macroprudential economist at SARB, said since the lockdown began, the Bank has already observed a sharp decline in economic activity, some signs of dysfunction in financial markets, and thousands of people restructuring their loans and taking up insurance premium holidays.
"We are probably only in the first phase of the impact but already we have started to see certain things coming through.
Coming months will be tough for banks and insurers
"What we are expecting to see in the coming months is that non-performing loans held by banks and other financial intermediaries will increase substantially. We anticipate that insurance policy lapse rates will be higher in the coming months and also that there will be increased withdrawals from investment funds because individuals are likely to lose jobs," said Smith.
The SARB said over and above policy lapses, insurance firms are likely to also face higher payout costs for claims related to business interruption, income protection, travel insurance, death and morbidity because of the virus and its associated lockdown.
Despite these emerging fears, the Bank said the domestic financial system remains resilient. Reserve Bank Governor Lesejta Kganyago said South African financial institutions have put substantial buffers in place to absorb the Covid-19 shock, and are in a much better position than they were confronting the 2009 global financial crisis.
He added that on top of the capital and liquidity buffers that banks have built for themselves over the years, SARB has increased its provision of short- and medium-term funding to the banking sector since March, while the reduction of interest rates should help households and firms continue repaying their debts.
The financial stability risk has been elevated
"However, let me be clear that the financial stability risks are elevated and the outlook is challenging. Just as the country has probably not seen the peak of Covid-19 infections yet, so the economic impact of the virus is also in its early stages. Much remains unclear about the nature and duration of the economic downturn we are currently experiencing," said Kganyago.
The expected contraction of the South African economy is also expected to weigh on the financial sector as government is the single largest debtor of the domestic banks while they in turn look up to government as the last resort in the event of a bank failure.
SARB has lowered SA's gross domestic product growth forecast to-7% for 2020, a decline more severe than the -1.5% recorded during the 2009 global financial crisis. The Moody's downgrade of SA's sovereign credit rating to junk in March also appears to have translated into adverse investor perceptions of the domestic banking sector’s creditworthiness, said the Reserve Bank.