(Bloomberg) -- South Africa’s central bank warned the country’s crumbling infrastructure, including its water systems and transport networks, pose a significant threat to the financial system.
“The sustained deterioration in critical infrastructure poses direct operational risks that could disrupt the functioning of the financial system,” the Reserve Bank said Thursday in its biannual Financial Stability Review. “While electricity availability appears to be gradually returning to historical trends, other critical infrastructure such as the supply and quality of water as well as transport infrastructure – especially rail, port and road networks – continues to degrade.”
While South Africa has managed to address an energy crisis, the continent’s most-industrialized economy is now grappling with a worsening water crisis following decades of underinvestment and poor maintenance. The authorities’ ability to maintain ageing water infrastructure is hampered by the fact that the nation’s water boards are owed 23.4 billion rand ($1.3 billion) in debt.
The failure of infrastructure will affect municipalities, who generate their revenue through sales of water and electricity, and their ability to repay loans to lenders in the financial sector, the Reserve Bank said.
“The failure of critical infrastructure could therefore threaten the financial viability of various municipalities, in turn affecting their ability to service their debt in the financial sector, and potentially placing further strain on the fiscus should government support be provided,” it said.
A new coalition government formed after elections in May stripped the African National Congress of its majority has made repairing critical infrastructure a priority.
The central bank noted that formation of the new government had improved the outlook for financial stability because of the positive sentiment it garnered. It also said the suspension of power cuts, evidence of fiscal consolidation and an improved sovereign credit rating outlook also contributed.
Other highlights:
- Introduction of a 1% positive cycle-neutral countercyclical capital buffer for lenders on Jan. 1 will have a marginal and temporary impact on the economy.
- Upward revision to the main fiscal deficit in October’s mid-term budget suggests that debt sustainability will remain a challenge going forward.
- The South African financial system’s exposure to government debt has increased since June
- SAGBs continued to dominate the local bond market, peaking at almost 94% of all listed bonds at the end of March in the build-up to elections before moderating to 89.7% by end-July.
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