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South Africa’s financial system has become more vulnerable since the outbreak of the Middle East conflict, with weaker growth prospects, higher inflation, rising costs and tighter financial conditions weighing on household and corporate balance sheets, the central bank said.In its latest half-yearly financial stability review, the South African Reserve Bank (SARB) said the country’s susceptibility to volatile capital flows has gone up as non-resident investors sell domestic assets in search of safe havens.Household distress has risen as the inflationary implications of higher fuel and transport costs erode real incomes, with interest rate cuts that were anticipated at the start of 2026 now highly unlikely to materialise.“Tighter financial conditions and the more uncertain external risk environment will continue to test financial system resilience for the remainder of 2026,” the Bank said, hastening to add that despite these risks, the South African financial system remains resilient overall.“Systemically important financial institutions are well capitalised and liquid, and the broader financial system continues to be supported by ongoing policy and regulatory initiatives and efforts to strengthen crisis preparedness and operational resilience,” it said.Last month the Bank raised its key policy rate by 25 basis points to 7%, warning of elevated inflation pressures as hopes faded for a quick end to the US-Iran war, which has hampered the flow of oil through the Strait of Hormuz, pushing local fuel prices sharply higher.The latest Stats SA data shows that consumer inflation accelerated to 4% year on year in April from 3.1% in March, reaching the top end of the 2%-4% tolerance band of the central bank’s 3% target.The oil price shock is expected to continue to exert inflationary pressure, the Bank said in its review. Its quarterly projection model, which pointed to rate cuts in 2026 prior to the Middle East conflict, now suggests another rate increase following the one last month.Structural vulnerabilities related to low growth, unemployment, market concentration and financial exclusion are likely to be reinforced by a weaker macroeconomic outlook, it said.GDP expansion is likely to be tepid in 2026 despite beating expectations at 0.5% in the first quarter, as higher input costs weigh particularly on the manufacturing, mining and agriculture sectors.The Bank said non-resident investors were net buyers of South African government bonds in the three months before the start of the Middle East conflict in late February. After the war began, a deterioration in global investor sentiment triggered a repricing of risk, resulting in the largest one-month sell-off of local bonds on record.Before the start of the Middle East conflict, the National Treasury expected sovereign debt to peak at 78.9% of GDP in 2026/27. “The sovereign debt-to-GDP ratio may turn out to be worse than projected and may not stabilise within the timeframe anticipated by the National Treasury,” the Reserve Bank said.It added that the temporary general fuel levy relief offered by the government to cushion consumers and businesses from the steep fuel price increases could affect the Treasury’s ability to achieve a primary budget surplus, despite its intention to recoup some of the forgone revenue within the current fiscal framework.The Bank said advances in frontier AI, most notably the release of Anthropic’s Claude Mythos Preview model, pose risks to financial stability by heightening the threat of systemic cyber incidents affecting critical systems and infrastructure. In addition the advances support sustained growth in technology-related share prices, which raises concerns over stretched valuations.While crypto asset activity does not currently pose a systemic risk to the domestic financial system, the Bank continues to monitor developments given the pace of growth in global stablecoin activity, evolving cross-border linkages and remaining gaps in the regulatory framework.It said climate-related vulnerability has increased marginally as concerns around energy security and affordability constrain the near-term pace of transition, despite stronger longer-term incentives for renewable energy adoption.
