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Reserve Bank warns of dire consequences for SA if govt goes into debt distress
The South African Reserve Bank (Sarb) warns that government is at risk of getting into severe debt distress, with serious implications for the broader economy.
RELATED: Downgrades by Moody's and Fitch heap more misery on South Africa
The details are contained in the second edition of its Financial Stability Review for 2020.
“The interconnectedness between the financial sector and the sovereign has emerged as a major threat to financial stability in SA.”
What does this mean for banks and insurers who have an intertwined relationship with the state?
In conversation with Bruce Whitfield, Kokkie Kooyman (portfolio manager, Denker Capital) traces the alarming rate at which our debt levels have been growing.
If you go back to 2011/2012 our debt to GDP was still 30%. It's now closer to 80%...
Kokkie Kooyman, Portfolio manager - Denker Capital
If it continues at this trajectory you're going to get to 120/130% very soon and the result of that is our interest build as a percentage of total expenditure is already now 28%... but not only will the interest rate that creditors or lenders charge us go up, but also the percentage of total expenditure will increase.
Kokkie Kooyman, Portfolio manager - Denker Capital
It leads to a very low growth rate because we haven't got a lot of options to stimulate the economy and because our interest rate is so high, the banks and insurers are investing surplus capital... into government bonds.
Kokkie Kooyman, Portfolio manager - Denker Capital
As a country goes into debt distress, it drags down the banking and insurance sector with it.
Kooyman says the likelihood of falling into debt default is slight, however.
But you will have eventually, the Reserve Bank printing more money which leads to higher inflation.
Kokkie Kooyman, Portfolio manager - Denker Capital
It's not good for banks although the interest margins will actually increase
Kokkie Kooyman, Portfolio manager - Denker Capital
The bad debts and the policy lapses of the insurers are unfortunately in the lower end of the market - the people who earn very little.
Kokkie Kooyman, Portfolio manager - Denker Capital
It is a problem when a large part of the population can't pay their debts or have to lapse their policies.
Kokkie Kooyman, Portfolio manager - Denker Capital
What about the contentious cutting of the public wage bill?
You do the country a favour by actually cutting the jobs of people who are not being productive in the economy because you force them to go and find other jobs - and they will if the government allows the private sector to get on with creating jobs!
Kokkie Kooyman, Portfolio manager - Denker Capital
Listen to Kooyman's analysis below:
This article first appeared on 702 : Reserve Bank warns of dire consequences for SA if govt goes into debt distress
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