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A 2023 Southern Africa Economic Outlook has cautioned the Bank of Zambia (BoZ) to remain vigilant in ensuring financial sector stability given the banking sector’ large exposure to government securities and associated potential risks.
The Outlook, launched this week by the African Development Bank (AfDB) and analyses the recent economic trends and developments in Southern Africa, indicated that banks’ exposure to sovereign risks had increased in the region.
It stated that the banking system had grown increasingly exposed to government debt in countries such as Malawi, Zambia and Zimbabwe, placing additional stress on financial stability.
Hence its recommendation for central banks, such as the BoZ, to remain vigilant to ensure financial sector stability given the banking sector’ large exposure to government securities and associated potential risks.
“For example, in Zambia as the government turned to domestic financing to finance its budget, the banking system’s net claims on the government grew to around 59 percent of total domestic claims in 2021–22 from around 27 percent on average over 2011–2016,” it stated.
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Likewise, according to the report, the Reserve Bank of Malawi and commercial banks’ large exposures to government securities posed potential risks to the financial sector given the level of domestic debt.
The report stated that debt uptake by the banking sector was high (67 percent) that it also crowded out resources available for the private sector.
“In Namibia, reflecting large fiscal financing needs, banks’ net claims to the government picked-up by 51 percent in 2021 and by further 30 percent (year-on year) at end-September 2024.
“In Botswana, the banking sector remains well capitalized but liquid assets in commercial banks decreased as the government sought to finance the deficit with longer-term government bonds,” according to the report.
Meanwhile, the report stated that Southern Africa economies faced emerging financial risks due to climate change disruptions.
“For example, the Zambian government intends to conduct a sector analysis and establish green loan guidelines for financial service providers to develop environmentally friendly financial products, with the aim of enabling them to identify and track climate change risks in their portfolios,” it stated.
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