South Africa heading for a financial crisis

Economist Dawie Roodt has warned that, if South Africa continues on its current trajectory, the country could face a financial crisis.

In this scenario, any spike in the country’s bond yields will put severe pressure on South Africa’s financial system, leading to an economic crisis.

However, Roodt explained that such a crisis could become an opportunity for South Africa, as it would force the government to change its behaviour.

In a recent interview with Sakeliga, Roodt outlined how a financial crisis could take shape in South Africa.

Roodt pointed out that around 20% of South Africa’s rand-denominated debt is held by foreign investors, mostly from Europe and the United States.

He explained that, in the coming years, particularly in light of South Africa’s tense diplomatic relationship with the United States, it is possible that the country could face economic sanctions.

The Centre for Risk Analysis has issued similar warnings, saying Washington has become increasingly frustrated by South Africa’s inability to meaningfully address its demands in negotiations over a trade deal.

This has led to several Bills being introduced in Congress to demand that the US government formally review its relationship with South Africa.

To date, none of these Bills has passed. Still, relations between Washington and Pretoria have continued to deteriorate, heightening the risk that legislation could pass and potentially lead to sanctions being imposed on South Africa.

Roodt warned that, should this happen, it could trigger a sell-off of South African bonds, which would see yields spike.

When bond yields rise, the value of those instruments falls, which would place severe pressure on local banks’ balance sheets.

“Now all of a sudden, the banks start getting into trouble because they do not have the value of the assets – they may still have the bonds, but the bonds are worth less now,” he explained. 

“That means that the banks can eventually get into trouble, and that can lead to a really bad financial crisis.”

The Reserve Bank has also previously warned that local banks and asset managers are at risk of destabilising the country’s financial system through their significant exposure to government debt.

Opportunity amidst crisis

Positively, Roodt said South African banks are generally well-capitalised, and the Reserve Bank is a highly respected and credible institution that could prevent such a crisis.

However, he said the risk is real, and if South Africa continues on its current trajectory, the country is heading for a financial crisis.

“That is a potential scenario – the bond yields spiking for whatever reason – and then it will put pressure on the whole financial system in the country,” he said.

“That’s going to be really bad for South Africa, and we’re heading for that if we continue like this – we’re heading for a financial crisis.”

Roodt noted that, while this type of crisis would be devastating for South Africa, similar outcomes in other countries – and even in South Africa – have shown that it could also present an opportunity for the country.

“We’ve seen financial crises that turned out relatively well in South Africa previously. Eskom is a good example of that,” he said.

“Previously, the private sector was not allowed to generate electricity, and then gradually the limits on how much they can generate were increased, and now it’s unlimited.”

“There wasn’t a change of heart, there wasn’t a change of policy, but reality forced them to look at Eskom differently. The same is happening to Transnet.”

Roodt explained that the best thing to do during a crisis is to put the correct macroeconomic policies in place to ensure the economy grows faster and becomes more resilient in the future.

He noted that this type of opportunity is not guaranteed, and the government can also respond incorrectly to such a crisis, leading to further trouble down the line.