March 27, 2023
Forecast: Grey clouds, hopefully giving way to some sunshine
On 24 February 2023, there were headlines everywhere regarding the fact that South Africa had been greylisted. This had been on the cards for quite some time, as the Financial Action Task Force (FATF), which acts as the global financial watchdog, had last year identified that South Africa has deficiencies in its anti-money laundering and counter terrorism financing, meaning this change to our status was likely.
There are several ways in which being greylisted can have a significant impact on a country’s economy, particularly its currency:
- A loss in confidence in the South African financial system, which in turn can decrease foreign direct investment into the country and hence demand for the rand.
- It is more difficult for South Africa to access lines of credit, as there is now higher risk attached to the country. As such, terms of such borrowing become less favourable, in the form of reduced amounts of exposure to the country that financial institutions are willing to take, as well as higher interest rates on the borrowed capital. This in turn can dry up potential development expenditure opportunities within the country.
- Financial institutions operating in South Africa may face additional reporting requirements or be subject to more frequent audits. The increased compliance costs and regulatory burden make it more difficult for financial institutions to do business in the country.
To mitigate the impacts of being greylisted, countries often take steps to improve their anti-money laundering and counter terrorism financing regimes, which is the move that South Africa has now been forced to take. Indeed, since the greylisting was first mooted, there has been increased rhetoric around the efforts to strengthen the fight against financial crimes.
To quote President Ramaphosa on this matter, “We have gone through a rigorous process of addressing the issues that FATF has raised with us. The fundamentals are in place, and we know what we need to do to get off the greylist. We are determined to do this as quickly as possible. This is important not only for our international standing, but also for our own ability to fight these crimes in our country.” As always, we will need to wait and see what actions follow the words in the months to come.
At least we can take some comfort from the fact that the country’s financial system and its associated regulations and industry bodies have a reasonable track record (unlike our recent political performance or those in charge of our SEO’s). In the past, South Africa has identified deficiencies and, through the strategic amendment legislation surrounding anti-money laundering and combatting terrorism financing, been able to improve the situation. Unfortunately, the fact remains that the country is a target for such illicit activity.
Also encouraging was Finance Minister Godongwana announcing during his budget that additional funds will be allocated to the Financial Intelligence Centre (FIC) to strengthen the fight against crime and corruption. One can only hope that the efforts made to get South Africa off the greylist will ultimately put us in a stronger position in the future in terms of global requirement and standards, and thereby improve the likelihood of continued capital flows into the country.
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