Weak South African economy prompting higher debt defaults - cenbank

PRETORIA, May 29 (Reuters) - Sluggish economic growth in South Africa is starting to increase risks arising from high levels of debt in the country, the central bank warned on Wednesday, with defaults growing in both consumer and corporate debts.

In its semi-annual review of financial stability, the South African Reserve Bank said some areas of lending, including unsecured lending, car finance and lending to sectors like construction and manufacturing, were showing particular strain.

Hendrik Nel, head of the SARB's financial stability department, said in a media briefing ahead of the release of the review that the SARB had been concerned for some time about when the impact of low growth on lending would start to show.

"We are seeing it now," he said, adding that while an accounting change had played a role in some of the trends, a deterioration in credit quality was now playing a bigger role than previously.

Consumers in Africa's most industrialised economy have struggled amid sluggish growth, high levels of debt and unemployment and rising pressures on their income, such as tax hikes, with this in turn hitting the performance of some of the country's biggest companies.

With corporate debt also rising and profitability weaker, the SARB said this could be a risk to financial stability.

"Should there be a significant slowdown in growth, highly leveraged companies could face difficulties servicing their debt; this would impact investment, increase the probability of default… and contribute to the slowdown in growth," the review said.

Debt servicing costs were rising, it continued, while companies' ability to generate cash to service their debt was declining in a handful of industries, namely the electricity, gas and water supply sector.

The vast majority of South Africa's power is provided by struggling state-owned utility Eskom, which has required successive government bailouts to survive.

Hefty government guarantees on state-run firms' debts - of which Eskom accounts for 55%, the SARB noted - also threaten to derail South Africa’s economic recovery.

The bank said there was a "high probability" of a significant amount of the liabilities arising from such guarantees materialising, which posed a risk to the country’s credit rating.

(Reporting by Emma Rumney Editing by Alexandra Hudson)

((Emma.Rumney@thomsonreuters.com; +27115952832;))

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