The South African reserve bank fears the possibility of inflation going beyond the expected target band of 3-6 percent this year. It said this would pose a threat to banks’ unsecured or installment finance books.
Giving out the possible reason for the rising interest, the Middle East, and Africa- EMEA’s emerging banking systems In 2016, said it is because banks’ unsecured or installment finance books are often at fixed rates and borrowers tend to be rather inflation sensitive. The rating agency went further to note that the south African banking system has been fairly resilient.
“A ratio of debt service to disposable income greater than 10 percent – 11 percent could cause credit losses across the sector to increase markedly.”
“Profitability has improved moderately, and we expect this will continue in 2016. In our view, a latent risk for banks stems from residential mortgage loans, which are exposed to a spike in interest rates.
“A sudden interest rate increase of more than 150-200 basis points, depending on its timing, could result in asset quality problems.”
The agency pointed out that the increasing inflation rates, drought, slow economic growth and the weaker rand are part of the reasons why households’ real income will not stay in step with their debt-servicing capacity. But that not withstanding, report has it that banks’ dependence on external debt remains limited, protecting them from the effect of the rand’s depreciation and risks related to changes in the government’s monetary policy
More so, corporate sector’s performance was said to be largely sound in 2015, and this would support banks’ asset quality, says the agency.
Meanwhile, the South African rand was reported to have weakened last week after President Jacob Zuma’s state-of-the-nation address that analysts and economists said did not deal with concerns raised by rating agencies. The rand slipped 0.7 percent to 15.9100 per dollar.
Bonds also weakened, with the benchmark paper due in 2026 adding 7 basis points to 9.24 percent.“There was only limited recognition of the current economic malaise with an overplaying of success of past policy targets,” said Peter Attard Montalto, head economist for emerging markets at Nomura International.