Page 102 - Risk Report 2024

1. Functional State 2. Politics

A functional, well-governed State is imperative: institutional Election outcomes and slow reform could affect portfolio
credit ratings are linked to and constrained by the sovereign flow, including increased capital outflows. An increase in the
rating; negative sovereign rating action (e.g. from State compliance burden (due to legislative and regulatory changes)
inefficiencies stymying economic growth), will reflect in sector may affect long-term investment decisions, adoption of new
institutions’ ratings. Loadshedding curtails economic activity technologies, and operational stability, hindering entities’
causing asset quality pressures, loss of investor confidence, competitiveness and financial viability. Financial, pension,
and reduced lending and investment activities. Bureaucratic and NHI reforms pose risks to the asset management and
inefficiency, crime, inadequate policy implementation, and the insurance segments. Fragmented decision-making and
regulatory unpredictability, adversely affect institutions’ inconsistent policies inherent to coalition politics and the risk
operational and strategic frameworks, delay policy enactment/ of political violence remain local and international investor
enforcement, complicate compliance efforts, increase concerns. Political uncertainty, geopolitical risks, and policy
operations costs, and ultimately affect the sector’s stability. developments influence consumer sentiments, confidence, and
Service delivery failures reduce small financial service spending patterns, as well as investment decisions. SA is less
providers’ resilience (as they don’t have resources to secure exposed to external financing risks yet remains vulnerable to
operational redundancy), exacerbate financial exclusion and global investor sentiment and external financing conditions
potential financial exploitation of vulnerable groups, and (which are tied to US interest rates). Higher interest rates and
hinder economic empowerment. inflation will affect households and small businesses, weighing
on asset quality indicators in 2024 on the back of subdued loan
growth. There is an opportunity to position SA as ‘The Lion of
Africa’ by implementing strategic reforms and leveraging its
unique strengths.

3. Economy 4. Social Security
Macroeconomic factors potentially threaten the sector’s growth, profitability Lower income levels and unemployment presents as credit
and stability. Higher inflation levels and interest rates may lead to declining risk (e.g. loans defaults and reduced savings). Broader social
asset prices, while continued rising in borrowing costs may result in responsibilities (e.g. board and executive remuneration,
increased loan delinquencies, which may impact balance sheets negatively.
Credit impairment charges have increased, together with credit impairments diversity), are coming under increased scrutiny. High
(on a combined basis) as credit models reacted to low growth, consumer unemployment and inequality limit the sector's expansion by
pressure, and the economic effects of loadshedding. Severe economic reducing economic activity, disposable income, limited access
decline would reduce consumer spending, and lead to higher loan default to credit, increasing fraud and physical security, and increasing
rates. SA’s continued greylisting deters foreign investment, increases financial exclusion. Responses include robust risk management
financing costs, and imposes increased scrutiny and restrictions, leading
to strained global financial relationships, higher cost of capital, reduced strategies, adapted lending practices, and inclusive financial
operational scope, and widespread financial distress. Such a situation could products. Social instability and insecurity can disrupt business
lead to reduced access to credit and capital for financial service providers, operations, deter investment, and erode consumer confidence,
potentially resulting in liquidity shortages and insolvencies. In such a negatively affecting the demand for financial products and
scenario, rigorous internal reforms and engagement with international services.
regulatory bodies would be needed to restore confidence and stability in
the sector. Challenging fiscal positions and sovereign risks intensified in
several African territories in which major SA banks operate, generating
higher sovereign-related risk costs. The banking system’s dependence on
wholesale funding represents a risk. SA’s lost status as main gateway into
Africa has diminished its attractiveness as an investment destination and
regional financial hub, impacting the sector’s competitiveness and growth
prospects.

5. Rule of Law 6. Water
Crime remains a key source of risk and negatively impacts The water-energy-food nexus affects the sector due to SA's
financial inclusion. Heightened crime levels disrupt operations, economic reliance on agriculture and energy-intensive
compromise data security, increase costs, and cause industries that are large-scale consumers of financial
reputational damage. The prevalence of fraud undermines trust products. Smaller sector players (who do not have resources
in the financial system and deters consumer participation in to implement redundancies in their operations) can suffer
formal banking channels. The recent high incidence of illicit business interruptions during water supply failures.
activity across commercial crime, and directors’ and officers’
insurance may lead to increased claims, which reduces
capacity, increases retention requirements, raises premiums,
and tightens underwriting criteria, in the face of increased
demand as organisational leaders face greater risks of litigation
for alleged misconduct, including failure to prevent corruption.
Mitigation includes robust anti-fraud and anti-money
laundering measures, enhanced security, and collaboration
between sector players and regulators.