Reserve Bank sends a warning to South Africa 

The increasing frequency and severity of extreme weather events pose a risk to South Africa’s financial stability and will most likely result in elevated inflation if it is not mitigated. 

This makes these events a rising concern for the South African Reserve Bank, with the country’s high cost of capital and a stagnant economy leaving it vulnerable to the shocks from these events. 

Reserve Bank Deputy Governor Fundi Tshazibana outlined these risks to South Africa’s financial system during a speech at the University of London’s School of Oriental and African Studies. 

Tshazibana was invited to lecture at the university by its Vice-Chancellor, fellow South African Adam Habib, to discuss the impact of climate change on financial institutions. 

“Climate change is a global problem, yet the ways in which climate-related risks materialise are diverse,” Tshazibana told attendees. 

South Africa and the broader continent are especially vulnerable due to historical underinvestment in resilience-building, financial system vulnerability, and the high cost of capital. 

Tshazibana said there is a valid criticism of whether this should be a concern of the Reserve Bank, with its mandate specifically focused on price stability. 

This may include criticism that central banks do not have the tools to address climate-related objectives and that they have been extremely successful in targeting inflation, so there is no need to change. 

“Both sides are right. Central banks have important roles ot play in a country’s climate strategy, but there are also indirect roles aimed at strengthening the long-term financial resilience of the economy,” Tshazibana said. 

She explained that climate risks, both physical and transition risks, contribute to price and financial instability – making them a problem for the Reserve Bank. 

Physical risks refer to the damage that climate-related events may have on property or the functioning of the economy. Transition risks are those posed by a shift away from carbon-based energy production, which alters the value of various assets. 

Furthermore, an economy with high inflation and financial instability cripples investment, making it a problem for the Reserve Bank. 

“Historically, we have observed that these conditions drive up borrowing costs, halt long-term funding, and trigger capital flight,” Tshazibana said. 

The risk to South Africa

South Africa is particularly at risk from the effects of extreme weather events on its insurance sector, with the rising frequency and severity posing a major threat. 

This threat is exacerbated by South Africa’s ailing infrastructure, which exaggerates the impact of extreme weather events. 

The lack of investment in maintaining and upgrading South Africa’s infrastructure has made it increasingly vulnerable to these events and inflated the financial losses that come as a result. 

This has long been a concern for the Reserve Bank, with it mentioning in several Financial Stability Reviews the threat this poses to the country’s financial sector. 

Santam Chief Underwriting Officer Michael Cheng outlined the impact of severe weather events on South Africa’s insurance industry in a research note earlier this year. 

Cheng explained that while infrastructure failure does not feature in global lists of the top ten risks for companies and individuals, it is in the top five locally. 

Domestic extreme weather-related losses were less severe in 2023 and 2024, with a similar number of events occurring in both years. 

However, the total claims from events exceeding R100 million per event increased in 2024, with these events occurring across wide geographic areas.

Some events, such as the 2022 KwaZulu-Natal floods, result in insurance claims of over R15 billion, with these floods having a total economic impact of R54 billion. 

This highlights the persistent gap between insurable losses and overall economic losses, which poses a major threat to the local economy.

Almost two-thirds of businesses surveyed by Santam stated that failing infrastructure poses a significant risk to their business, and 83% identified poor infrastructure as the primary emerging risk. 

Businesses and households flagged various infrastructure issues spanning deteriorating road and rail infrastructure, interrupted water supply, and the well-documented issues across the national electricity grid. 

This is particularly concerning in areas where risk is poorly understood or where failing infrastructure amplifies the impact of extreme weather, insurance coverage becomes increasingly difficult to price and provide.

The Reserve Bank’s major concern here is with the country’s growing insurance gap, which has been widened by insurers’ need to increase premiums to match the rising cost of coverage and the increasing cost of reinsurance. 

It said this is a growing area of focus, as it has the potential to significantly impact South Africa’s financial system due to its global exposure.

The insurance gap refers to the portion of economic losses arising from climate-related shocks that remains uninsured, and it is expected to widen as the risks associated with climate change intensify.

A related issue is the increase in uninsurable risks, which insurance companies explicitly exclude from available insurance coverage.