Africa-Press – South-Africa. South Africa’s financial markets are becoming increasingly shallow and less liquid, reducing the ability of borrowers and investors to diversify.
This inability to diversify poses a threat to financial stability, as more borrowers and investors are exposed to the same or similar risks.
It also limits the ability of local financial markets to have a buffer to absorb external shocks without the impact spreading throughout the economy.
This is feedback from the Organisation for Economic Cooperation and Development (OECD) in its latest survey on the South African economy.
The organisation said that South Africa’s financial system is highly sophisticated and developed compared to its emerging market peers.
The country also has relatively deep capital markets, making it an attractive destination for investors seeking exposure to liquid emerging market assets.
This sometimes results in South African assets trading as a proxy for sentiment towards emerging market assets, leading to significant swings in the rand, in particular.
However, the OECD warned that South Africa’s capital markets are becoming shallower and less liquid, posing significant risks to the local financial system.
It pointed to the fact that government bonds make up 81% of total outstanding bonds in issue, compared to 60% in 2008.
The number of companies listed on the Johannesburg Stock Exchange (JSE) has also declined every year from 2016 to 2023.
It also said that turnover in local bond and equity markets has been declining, resulting in a lack of liquidity on the exchange and in financial markets.
The major driving factors behind this are the country’s lacklustre economic growth, which has translated into a stagnant savings pool and capital for investment.
Rising government borrowing has also resulted in the crowding out of private debt, further stifling economic growth and limiting borrowers’ ability to diversify.
Foreign investors have also largely left the local market, dumping equities and bonds as the country’s economy stagnated and it descended into sub-investment grade.
This is evident in the graphs below, which also illustrate the growing exposure of local banks to government debt.
Financial instability
The OECD stated that the increased exposure of local banks to government debt poses a key risk to financial stability.
Combined with the government’s elevated debt and debt-servicing costs, which are projected to remain above 20% of revenues in the coming years, this has resulted in financial institutions being exposed to a single, common risk..
The domestic financial sector has held an increasing proportion of government bonds over recent years, with the share of government bonds in banks’ total assets reaching 17% in March 2025, up from around 8% in 2013.
This exposes the domestic financial sector to a common risk of a sharp repricing of government debt.
A higher concentration of government bonds on domestic financial institutions’ balance sheets also inhibits the capacity of the domestic economic system to absorb financial shocks.
It may also lead to increased episodes of high volatility and low liquidity in the domestic bond market, impairing price discovery and deteriorating trading conditions in the rest of the financial market.
In turn, this would reduce the overall resilience of the domestic financial system.
Recent assessments by the Reserve Bank decided that while no formal policy intervention was required, the Prudential Authority would develop ways to monitor and close valuation gaps in banks’ holdings of government bonds.
Phasing in various prudential measures over time could also help reduce risks, the OECD said, while also encouraging lending to the private sector.
Continued fiscal consolidation will help reduce the financial sector’s long-term exposure by reducing the government’s debt stock in the market.
Non-residents have increased their net holdings of government bonds since May 2024 as investor sentiment towards South Africa improved.
This helps diversify the investor base by capitalising on local government debt, thereby easing the pressure on local banks to absorb additional debt issuances from the state.
While the non-resident share of government debt has not yet increased due to high levels of debt issuance, a continuation of this trend may reduce the domestic financial system’s exposure to government debt, the OECD said.
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