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IMF Country Report No. 22/39

SOUTH AFRICA

FINANCIAL SECTOR ASSESSMENT PROGRAM

FINANCIAL SYSTEM STABILITY ASSESSMENT

February 2022

This paper on South Africa was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on January 21,2022.

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Title page

SOUTH AFRICA

FINANCIAL SYSTEM STABILITY ASSESSMENT

January 21, 2022

Approved By

May Khamis and Abebe Selassie

Prepared By

Monetary and Capital Markets Department

Context: The economy recovered strongly in 2021, following an unprecedented real output contraction in 2020. However, the outlook remains precarious amidst projected future low growth, high unemployment and adverse debt dynamics, and the recovery pace is unlikely to be sustained. Ample buffers allowed the financial system to handle the COVID-19 shock relatively well, but domestic and external downside risks remain substantial—with potential implications for asset quality, profitability, and solvency.

Findings: Banks are resilient in the baseline but face notable capital erosion under a severe stress scenario, with weak debt servicing capacity of corporates and the potential intensification of the sovereign nexus posing risks to the financial system. Financial sector regulation is generally strong, with substantial progress since the 2014 FSAP, but more intrusive supervision, a formalized early intervention framework and completed safety net reforms are needed. Progress to further increase financial inclusion and access to finance has slowed in recent years, as account utilization remains limited and micro, small, and medium-sized enterprises (MSME) experience challenges in obtaining financing. The fintech sector remains small, and banking sector entry barriers continue to limit competition.

Policies: The challenging environment calls for more intensive supervision, with greater focus on governance and less reliance on external auditors. Further efforts to expand climate change risks in stress testing and supervision and stronger oversight of the growing fintech sector are also warranted. The mission recommended completing the bank resolution framework and finalizing the deposit insurance scheme, which will improve the authorities’ ability to handle shocks. Financial sector competition would benefit from reforms to foster market entry and increase capital market financing (including ‘green’ finance).

The FSAP team was led by Jennifer Elliott, IMF Mission Chief, and Eva Gutierrez, World Bank Mission Chief, and included Constant Verkoren (deputy mission chief), Zsolt Ersek, Rohit Goel, Ren Jie, Aldona Jociene, Tanai Khiaonarong, Suchitra Kumarapathy, Ken Miyajima, T. Tjoervi Olafsson, Nobuyasu Sugimoto, Thierry Tressel, and Christopher Wilson (all IMF); Uzma Khalil (deputy mission chief), Swee Ee Ang, Catiana Garcia Kilroy, Katia D’Hulster, Sonia lacovella, Harish Natarajan, Douglas Randall, Rekha Reddy, Martijn Regelink, Diego M. Sourrouille, and Fiona Stewart (all WB); as well as Geof Mortlock and Nick Strange (Bank of England) as external experts. Ren Jie and Alice Mugnier provided research support to the IMF team; and Charmane Ahmed and Natalia Naryshkina supported the preparation of this report.

The team met with Governor Lesetja Kganyago, Deputy Governor and Prudential Authority CEO Kuben Naidoo, and senior officials of the South African Reserve Bank; Deputy Director General Ismail Momoniat and senior officials of the National Treasury; as well as senior officials from the Prudential Authority, Financial Services Conduct Authority, the National Credit Regulator, and private sector counterparts.

FSAPs assess the stability of the financial system as a whole and not that of individual institutions. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.

This report was prepared by Jennifer Elliott and Constant Verkoren, with contributions from the members of the IMF FSAP team.

Contents

• Glossary

• EXECUTIVE SUMMARY

• BACKGROUND

• A. Macrofinancial Context

• B. Financial System Structure

• SYSTEMIC RISK ASSESSMENT

• A. Key Risks, Assessment Methods, and Scenarios

• B. Bank Solvency Stress Tests

• C. Bank Liquidity Stress Tests

• D. Nonbank Risk Analysis: Insurers, Fund Managers, and Pension Funds

• E. Macrofinancial Linkages: Households and Corporate Sector

• F. Interconnectedness

• G. Capital Flows

• H. Climate Change Risk Analysis

• FINANCIAL SECTOR OVERSIGHT

• A. System-Wide Oversight and Macroprudential Policies

• B. Systemic Liquidity Management

• FINANCIAL SUPERVISION AND REGULATION

• CRISIS MANAGEMENT AND FINANCIAL SAFETY NETS

• FINANCIAL SECTOR DEVELOPMENT

• A. Competition and Efficiency

• B. Financial Inclusion and Access to Finance

• C. Market Development

• AUTHORITIES’ VIEWS

• BOX

• 1. How Vulnerable Are Smaller Banks?

• FIGURES

• 1. Macroeconomic Context

• 2. Market Developments

• 3. Financial System Structure

• 4. Bank Sovereign Nexus

• 5. Macroeconomic Scenarios

• 6. Macroprudential Policy

• 7. Macroeconomic Context

• 8. Temporary Measures to Offset the Impact of COVID-19

• 9. South Africa and Peer Countries: Financial Soundness Indicators

• 10. Insurance Sector Developments

• 11. Nonfinancial Corporate Sector

• 12. Household Sector

• 13. Growth-at-Risk

• 14. Solvency Stress Tests

• 15. Bank Stress Testing Sensitivity Analysis

• 16. Bank Liquidity Stress Tests

• 17. Domestic Interconnectedness

• 18. Cross-Border Interconnectedness

• 19. Capital Flows

• 20. Climate Risks

• 21. Banking Sector Competition and Efficiency

• 22. Financial Inclusion and Access to Finance

• TABLES

• 1. Key Recommendations

• 2. Selected Economic Indicators, 2018–23

• 3. Financial Soundness Indicators, 2018–21

• APPENDICES

• I. Stress Testing Matrix

• II. Risk Assessment Matrix

• III. Corporate Sector Stress Test

• IV. Managing the Sovereign-Financial Sector Nexus

• V. Twin Peaks Implementation

• VI. Status Recommendations 2014 FSAP

Glossary