The South African Reserve Bank (Sarb) has issued a stern warning regarding the perpetual risks that climate change poses to the financial sector.
In its latest Financial Stability Review (FSR) published on Thursday, the Sarb identified climate change as one of three major threats to the financial stability of the nation, alongside the looming spectre of cyber incidents and persistently low economic growth.
In the review, the Sarb highlighted a growing consensus within academic and regulatory literature that climate change introduces two primary types of risks: physical risks and transition risks.
Physical risks are defined as the economic losses stemming from the increasing frequency and intensity of adverse weather events, such as floods, droughts, and storms—a trend already observable in South Africa.
On the other hand, transition risks are exacerbated by an uncoordinated global response to climate change, where financial institutions face challenges in recognising, preparing for, and complying with evolving climate-related regulations.
With South Africa’s financial system significantly exposed to carbon-intensive activities and assets, the bank warned that the country was particularly vulnerable to these insidious risks.
Sarb Governor Lesetja Kganyago said the risk of a disorderly global shift to a low-carbon economy had intensified as countries transition at varying paces.
However, Kganyago said South Africa’s financial system was so far demonstrating a high degree of resilience in response to global shocks such as intensifying global conflict with the conflict in Ukraine and the escalating war in the Middle East.
“Climate change will be an abiding challenge with impacts that include risks to financial stability. Last year, we conducted a first climate risk stress test to evaluate the resilience of systemically important banks to climate-related shocks,” Kganyago said.
“The FSR provides an overview of the lessons learned from the test. We have also published a stand-alone technical report on climate risk stress tests.”
The FSR introduced an overarching framework for assessing climate-related financial stability risks and vulnerabilities in the South African financial system.
The framework maps the process the Sarb follows to gather relevant information and assess the residual vulnerability of the South African financial system to climate-related shocks, after accounting for existing mitigating measures.
These processes aim to align the financial stability monitoring and assessment framework with international best practice.
Meanwhile, the Sarb also warned about the country’s cybersecurity vulnerabilities.
The FRS said the convergence of rapid technological advancements, mounting geopolitical uncertainties, and a significant skills gap in the cybersecurity industry was creating an increasingly complex cyber-environment that posed substantial risks to the financial sector and beyond.
The Sarb has highlighted that this technological evolution was not merely a challenge for local firms but also exacerbates the disparities between advanced economies and emerging markets like South Africa.
Current reporting shows that South Africa’s cybersecurity spending consistently remains alarmingly low—less than the mature market benchmark of 0.25% of GDP annually. This deficit comes despite the pressing reality of costly data breaches.
In 2024, the average cost of data breaches in South Africa was $2.78 million, a marginal decrease from $2.79m the previous year, yet a figure that remains unacceptably high.
Moreover, the nation’s ongoing electricity-supply challenges add another layer of complexity and vulnerability to cybersecurity efforts. While improvements have been noted, inconsistent power supply poses a latent risk to digital infrastructures, exposing them to potentially devastating cyber-attacks.
The Sarb cautions that many backup power systems currently in use lacked the necessary robust security protocols to guard against such threats.
As for economic growth, the Sarb said South Africa was grappling with a persistent economic malaise as recent analyses revealed that real GDP growth has averaged a mere 0.54% annually since 2018.
This stagnation has entrenched a series of pressing issues, including low private investment, heightened inequality, and a rising tide of unemployment that threatens the livelihoods of millions of South Africans.
The economic landscape appears even murkier with the looming possibility of the non-renewal of the African Growth and Opportunity Act (Agoa) and the imposition of tariffs on South African exports.
Recent findings from the Sarb’s April 2025 Monetary Policy Review (MPR) illustrated the potential repercussions of such trade adjustments through three distinct scenarios.
Under the first scenario, the termination of Agoa without imposed tariffs on South African goods results in a minor decline in GDP, estimated at 0.04%. The next scenario envisages a more dire situation, where Agoa is terminated alongside the imposition of a significant 25% tariff on South African exports. In this instance, the GDP would see a more substantial decrease, dropping by 0.23%.
The final and most concerning scenario presents an even bleaker outlook. If Agoa lapses, combined with a 25% tariff and a subsequent 15% depreciation in the rand due to risk premium spillovers, GDP is predicted to plummet by 0.69%.
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