The South African Reserve Bank (SARB) has issued a warning about the risks to the country’s financial stability, citing capital outflows and the potential for sanctions following allegations made by a U.S. diplomat of weapons supply to Russia in support of its Ukrainian campaign.
These risks, coupled with the persistent threat of power cuts and high inflation, have heightened systemic risks within South Africa’s financial system, according to the SARB’s biannual assessment released on Monday.
This year has seen a barrage of negative factors impacting South Africa’s economy, with the country facing its worst-ever power cuts, resulting in significant additional costs for businesses and households.
In February, South Africa was placed on the “grey list” by the Financial Action Task Force (FATF), an international financial crime watchdog, in an effort to enforce the implementation of anti-money laundering and counter-terrorism financing standards.
The FATF grey-listing, combined with challenging local economic conditions, has led to a decline in foreign participation in South African government bonds, dropping from 42% to 25% over the past five years, as highlighted in the SARB’s Financial Stability Review (FSR).
In addition to these domestic concerns, a recent diplomatic dispute with the United States, triggered by accusations of weapons supply to Russia, has raised fears of potential sanctions and caused a sharp decline in the value of the South African rand.
The report states that imposing sanctions on South Africa would severely impact trade, investment flows, and the ability to conduct transactions with correspondent banks in USD. While the country’s domestic financial institutions and system have shown resilience amid global banking sector turbulence, a combination of global and local factors could test their strength beyond the next 12 months.
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