Banks have forecast lower earnings this year due to rising bad debts.

(Reuters) - South Africa's financial system is fundamentally sound, and has so far weathered global market turmoil without major pressures, the central bank said on Thursday.

But the bank said in its Bank Supervision Annual Report 2008 that the system faces increased macro-financial risks and institutions are braced for a less benign environment including increased credit risk.

The country's top banks have forecast lower earnings this year, largely because of rising bad debts as consumers default on loans in the midst of the country's first recession in 17 years.

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