South Africa's central bank said on Wednesday the risk of a spillover of the Russia-Ukraine war could hurt the country's financial stability through rising food and fuel inflation, lower economic growth and high unemployment.
Emerging markets have been unduly impacted by the Russia-Ukraine crisis through increases in the price of oil, gas, wheat and other grains, forcing central banks to tighten monetary policy even at the risk of undermining economic growth.
South Africa's central bank last week increased its prime lending rate by 50 basis points to 4.75%, its highest increase in six years, to rein in inflation.
In its biannual health check of the financial system, the South African Reserve Bank (SARB) said that while the financial system of Africa's most advanced economy was "resilient", stagflation fears could exacerbate inequality and slow growth.
"South Africa remains vulnerable to spillover effects of global events, particularly the Russia-Ukraine war and global stagflation concerns," it said, adding that it could also disrupt social stability.
Stagflation is characterised by a prolonged period of high inflation, lower economic growth and high unemployment.
The SARB said in 2022 it will set up a deposit insurance company which would insure deposits of almost 90% of depositors with a proposed coverage level of 100,000 rand.
It flagged concerns that rising inflation and inequitable growth could lead to more incidents of social unrest like the one seen in July last year.
The SARB also pointed out climate risks to the country's insurance industry, which is still reeling from the April floods which killed 448 people, adding that it could increase the cost of insurance as such calamities become more frequent.
Rising government debt, any emergence of a new and more deadly wave of COVID-19 and rising cyber attacks also pose risks to South Africa's financial stability, it said. ($1 = 15.6057 rand)
(Reporting by Promit Mukherjee; Editing by Catherine Evans)