Record load shedding a risk to financial stability, Sarb warns

The South African Reserve Bank has raised concern about the threat an inadequate and unreliable power supply poses to financial stability as the country experiences record blackouts.

Sustained load shedding impacts negatively on domestic economic growth, investor sentiment and business activity, exacerbating other pre-existing vulnerabilities, the Sarb said in its latest financial stability review.

South Africa has been experiencing energy shortages since 2008, with state-owned utility Eskom unable to meet demand from its old and poorly maintained plants.

Other issues the Bank linked to the blackouts included:

• Constraints in recharging batteries for ATMs and cellular network towers, which posed a risk to the effective functioning of key infrastructure on which the financial system rests.
• Increased insurance claims from households and firms due to power surge damage, fires and crime, which could in turn lead to higher insurance and excess costs.
• The effect of severe power cuts may not be fully priced into the market, even as local investors appear more pessimistic about South Africa.

President Cyril Ramaphosa in July announced measures to address the energy crisis, including scrapping licensing requirements for plants built by the private sector. The government also raised the amount of electricity it plans to buy from privately owned plants.

The Sarb also noted that despite better-than-expected outcomes from last month’s budget update, the financial sector’s high level of exposure to government bonds remains a risk, especially if there were to be a shock that leads to further volatility and a sharp repricing of the debt. Examples of state-owned enterprises’ liabilities being taken over by government exacerbates this vulnerability, it said.

Read: S&P sees South Africa avoiding Eskom default

Externally, the risk of escalating global conflict and geopolitical polarisation, primarily due to the ongoing Russian-Ukraine war, presents a key risk to South Africa and its global peers because there was a risk of capital outflows from emerging markets, according to the Sarb.

Despite this, the country’s financial system remains resilient, and financial institutions have maintained adequate capital buffers to absorb the impact of shocks, a resilience that’s expected to be sustained over the forecast period, it said.  — (c) 2022 Bloomberg LP

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