South Africa: The Financial Sector-Sovereign Nexus

IMF Working Papers, March 4, 2022

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Globally, financial institutions have increased their holdings of domestic sovereign debt, tightening the linkage between the health of the financial system and the level of sovereign debt—the “financial sector-sovereign nexus”—during the ongoing COVID-19 pandemic.
In South Africa, the nexus is still relatively moderate, albeit rising.
The increased focus of the Prudential Authority on the associated risks provides reassurance.
Absent the necessary fiscal consolidation and structural reforms, risks from the nexus to both the financial system and the sovereign will increase.

Explore options to mitigate nexus-related risks through the use of regulatory measures.
Prioritize fiscal consolidation and structural reforms to reduce the potential for the nexus to amplify risks to the financial system and the sovereign.

Subject: Credit risk, Domestic debt, Financial institutions, Financial regulation and supervision, Government securities, Public debt, Sovereign bonds
Keywords: Africa, Bank Regulation, Bank-Sovereign Nexus, banking risk, Banking Risk, Capital Flows, Credit risk, Domestic debt, Financial Sector, Financial Stability, Global, Government securities, holdings of government securities, holdings of Government Securities, Home Bias, investor Base, nonbank financials, nonresident holding, South Africa, Sovereign bonds, Sovereign Debt, Sovereign Risk