Reserve Bank governor says market expects US sanctions

Lesetja Kganyago, the governor of the South African Reserve Bank (SARB), said the market is already behaving as if sanctions will be imposed on South Africa.

Kganyago made these comments during a briefing to Parliament’s finance committee regarding the SARB’s Financial Stability Review (FSR).

The governor said investors and lenders have a negative view of South Africa’s non-aligned stance on the Russia-Ukraine war.

“In our interactions with investors, South Africa’s neutrality is misunderstood and increasingly questioned,” Kganyago said.

President Cyril Ramaphosa has sent an envoy of four ministers to meet with the G7 to explain South Africa’s stance on the conflict.

The questioning and lack of understanding of South Africa’s stance have led to foreign investors selling off South African bonds and shares.

This causes bond prices to fall and bond yields to rise, increasing the government’s debt-servicing costs in the future.

Kganyago also noted that investor appetite for South African government bonds has decreased in recent weeks. 

The Reserve Bank has not included sanctions in its projections and baseline assumptions as it still views sanctions as highly unlikely.

However, it is concerned about the behaviour of the market, which seems to be anticipating that sanctions will be imposed on South Africa.

Secondary sanctions could be imposed on South Africa due to its transactions with Russia which has had primary sanctions imposed on it.

These sanctions would restrict the country’s ability to make payments in the US dollar, significantly impacting imports and exports while trade would plummet and capital flows would effectively halt. 

However, Kganyago also said that other factors are playing a role in creating negative sentiment around South African assets. 

These other factors include load-shedding, deteriorating public services, and poor tax collection in April. 

Sanctions threaten financial stability

The SARB’s latest Financial Stability Review listed the usual risks, including tight global and local financial conditions, high-interest rates, the FATF grey listing, load-shedding, and poor economic growth.

Since the November 2022 FSR release, two new risks have been added:

• Capital outflows and declining market depth and liquidity
• Secondary sanctions amid heightened geopolitical polarization

The SARB said South Africa’s desire to maintain political neutrality might not be perceived as such, potentially resulting in secondary sanctions imposed by the United States.

The South African financial system will not be able to function if it cannot make international payments in US Dollars.

More than 90% of South Africa’s international payments are currently processed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, Herco Steyn, the lead author of the report told reporters.

“Should South Africa be banned from SWIFT due to secondary sanctions, these payments will not be possible,” he said.

There will also be a loss of correspondent banking relationships and more intensive scrutiny of South African financial institutions by foreign counterparts, even without formal secondary sanctions.

It will further cause a sudden stop to capital inflows into South Africa and increased outflows out of the country.

The diplomatic fallout resulting from the comments by the US Ambassador to South Africa on 11 May 2023 led to a sharp sell-off in the rand.

It reached its worst-ever level against the US dollar, trading at R19.51 to the US dollar on 12 May 2023.