SA’s capital markets have become shallower and less liquid in recent years, says the Reserve Bank, which is concerned this means fewer options for local investors and borrowers and more concentration of risk.
SA’s deep, liquid domestic capital markets have always been considered an advantage, enabling companies to raise capital at home and government to fund itself locally rather than relying on offshore financing.
But the Bank in its latest Financial Stability Review noted that the JSE had seen net company delistings annually since 2016, and that government bonds now account for 81% of outstanding bonds in the domestic bond market, up from 60% in 2008.
“Turnover in the domestic bond and equity markets have also declined in recent years, potentially affecting efficient pricing, investor returns and the cost of funding,” the review said.
Reasons for this included SA’s low growth and domestic savings rates, the crowding out of private sector debt by government, reduced foreign portfolio investment and domestic investors increasingly diversifying into global markets, it said. Non-resident holding of domestic shares reached a new low of 27.6% at end-March, while by end-2023, offshore asset allocation by domestic institutional investors had almost doubled since 2012, after limits on offshore investment were raised.
The Bank again expressed concern about SA’s fiscal trajectory and specifically the quantity of government bonds SA’s banks and other financial institutions were holding and the risk this high exposure to government debt posed to financial stability.
Herco Steyn, from the Bank’s financial stability division, was concerned that the big sell-off by foreign investors of government bonds during Covid-19 had continued after the pandemic.
The decline in foreign interest has meant domestic institutions have had to pick up the slack.
“Government bonds comprise a high and growing proportion of financial institutions’ balance sheet, potentially crowding out lending to or investing in the private sector, exposing the financial system to market risk in the event of a sharp repricing of government debt and undermining market resilience as the financial system is increasingly exposed to a common risk,” the Financial Stability Review said.
The Bank on Wednesday also highlighted the urgency for SA to exit the greylist by mid-2025, as failure to do so could result in a prolonged stay.
The review brought attention to the additional damage to SA after being placed on the greylist by global financial crime watchdog the Financial Action Task Force (FATF) in March 2023.
The EU included SA in its list of high-risk countries in June 2023 and the UK classified SA as a high-risk third-party country, with the European Securities and Markets Authority not recognising the JSE Clear as a qualifying central counterparty from December 29 2023. The Bank of England granted a 15-month run-off for JSE Clear that ends in March 2025.
SA committed to a FATF action plan to address the remaining eight strategic deficiencies in its anti-money-laundering and combating of terror financing by January 2025. SA will be removed from the greylist if the task force deems it to have addressed these.
“Everything is being done to expedite progress,” Steyn said. “I think we would see long-term repercussions in terms of remaining on the list for longer.”
With the Financial Stability Review the Bank also reported back on its latest stress testing exercise on SA’s insurers, finding life and nonlife assurers were adequately capitalised.
While banks are seeing the highest level of non-performing loans in a decade, after a long period of high interest rates, they are setting aside ample provisions for this.
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