Page 39 - Risk Report 2024

IRMSA
39
RISK REPORT 2024/25
• SA’s path to a lower net carbon economy is unclear and trading partners will increasingly examine the
carbon footprint of import value chains. The greener energy production drive is metals/mineral intensive
with commodity opportunities. Escalating military-related capex could also boost commodity prices
which will improve SA’s purchasing power.
• Operation Vulindlela is critical to increase growth and returns on capital employed to compensate
for SA’s perceived investment risk. Progress on a legislative framework to enable private participation
in infrastructure development is positive. The State must continue to drive reform, prioritise fiscal
sustainability, and maintain an independent SARB.
• Fiscal failure and its implications for financial services may be caused by the following:
• Increasing expenditure demands and low growth leading to sustained large budget deficits and an
increased gross loan debt ratio. Debt service costs may exceed 20% of revenue in 2024/25. Stabilisation of
debt at 75% by 2025/26 will increase budget execution risk (given pressure to extend social grants), with
no new SOE grants planned.
• Efficient tax revenue funds public expenditure and investments. Higher tax revenues due to high commodity
prices will end soon and high NHI implementation costs are anticipated in future. Modernisation of
systems will improve collections, but tax reforms (with tax‐to‐GDP ratio reaching 25.3% by 2026/27) are
contingent on higher GDP growth.
• Consolidated spending by function may increase on average at 3.9% p.a. in the medium-term, implying
decreased spending in real terms, which seems unlikely. Most State debt is in Rand, therefore Rand
weakness and inflation are more likely than debt reprofiling/restructuring should the debt ratio not be
stabilised, if the State pursues prescribed asset legislation (distorting bond market returns) or utilises the
SARB’s balance sheet (which will cause high inflation).
• Sovereign debt rating downgrades will cause higher real borrowing costs, crowd out private sector
investment, and constrain credit extension. A deteriorated fiscal policy impacts commercial banks and
retirement funds (holding Government debt as assets on balance sheets) with guaranteed annuities
tied to fixed interest instruments including Government bonds and will ultimately expose insurers and
households’ interest in pension funds.
• Increased headline inflation remains within 3%-6% target range, with the repo rate expected to remain
unchanged for 2024 and cuts being priced in by the market for early 2025. Unsustainable fiscal policy may
raise inflation concerns, which may reflect in Rand weakness.
• Geopolitical fragmentation may lead to the following:
• SA’s FATF Greylisting and EU High Risk listing cause reputational damage and trade frictions, with potentially
diminished net capital inflows (partly due to SA’s having lost its status as the main gateway into Africa).
• Geopolitical alignments may lead to sanctions (in the event of major disputes with key investment/trading
partners) or cancellation of beneficial arrangements such as AGOA.
• SA’s globally integrated, sophisticated financial system renders sudden economic collapse unlikely (as
other trade blocks would protect their relationships with SA). This incentivises prudent fiscal and monetary
policies and investor relations.
• Severe disruptions to financial flows into SA will affect economic activity and by extension, fiscal
sustainability.

Risk Impact on Economic Sectors

Agriculture, Forestry & Fisheries 2 Mining 1
Communication 8 Professional Services 13
Construction & Real Estate 10 Public Service / Government 14
Education 6 Sport & Recreation 16
Energy 7 Tourism & Hospitality 12
Healthcare 9 Retail, Trade & Commerce 11
Financial Services 4 Transport & Logistics 5
Manufacturing 3 Non-Profit / Civil Society / NGOs 15