BM warns recession in South Africa “may have adverse impact on Mozambican companies and families”

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BM warns recession in South Africa “may have adverse impact on Mozambican companies and families”

4:16 CAT | 03 Jul 2020

Image: Banco de Moçambique

The recession affecting South Africa, whose economy is expected to contract eight percent this year, “may have a adverse impact on Mozambican companies and families”, the Bank of Mozambique warns, noting Mozambique’s strong dependence on South Africa’s economic performance.

At the end of June, the International Monetary Fund revised the recession it had forecast at the beginning of the year for South Africa, indicating that the neighbouring country’s gross domestic product is expected to fall by 8%.

“The Mozambican economy is highly interconnected with the South African economy, with this country being Mozambique’s largest trading partner and with concomitant representation in the Mozambican financial system. In this sense, the prospects of low growth in South Africa will be transmitted to all productive sectors in that country, increasing the credit risk, with knock-on effects in financial stress. Ultimately, due to the interconnection mentioned above, this scenario may have an adverse impact on Mozambican companies and families,” the Bank of Mozambique warns.

“Low production, rising unemployment, weak consumer and business confidence, reduced investments, as well as the slow implementation of domestic structural reforms, contributed to the increase in risk in the South African economy. South Africa’s financial sector is also characterised by well-regulated financial institutions, which are highly capitalised, liquid and profitable, supported by a solid regulatory and financial infrastructure. Even so, it lives with vulnerabilities such as the deterioration of the fiscal position, recurring threats to cybersecurity and weaker global economic growth, with repercussions for emerging markets,” the central bank notes in its First Financial Stability Report for 2020.

“The poor performance of the South African economy is reflected in financial stability, through the credit channel. An increase in financial stress in small and medium businesses, as well as families affected by job losses or deteriorating disposable income, may increase credit risk.

The risks of the South African economy, especially the macroeconomic and credit risks, may be passed on to the Mozambican economy, given the latter’s strong dependence on South African economic performance,” the Bank of Mozambique report indicates.

By Aderito Caldeira