South Africa was added to the Financial Action Task Force’s (FATF) global grey list on 24 February 2023, surprising almost no one.
Despite the South African government’s efforts to fast-track new laws to address the FATF’s highlighted issues, many analysts and economists – and the markets at large – had already priced in and expected the listing.
But even though the greylisting was expected, it was met with quite a varied response – from the national government trying to downplay its impact to economists warning of worse to come – and many South Africans have been left feeling uneasy about what the greylisting actually means for the country, and where we are heading from here.
According to Kelin Pottier, a product development specialist at 10X Investments, the reality of the greylisting is somewhat muted. South Africa as a whole will, of course, be impacted – and indeed, the risk of things going from bad to worse is always present.
But for now, at least, there’s no need to panic – because the country is still in a strong position in the global marketplace, and the government is sending all the right signals that it wants to improve.
What the greylisting really means for us
Pottier said that the greylisting was not a shock to markets that have been dealing with South Africa for a long time and know its risk profile quite well.
He said that the market is constantly assessing risks on a daily basis – and something like a greylisting declaration from the FATF often comes long after the fact.
“The world doesn’t wait for a pronouncement of a greylisting to know that South Africa is a high-risk jurisdiction,” he said. “This has been the way countries have been dealing with us since state capture and beyond.”
This has been a common remark among economists and analysts reacting to the greylisting. Even President Cyril Ramaphosa followed this line of thinking: having South Africa on the grey list is concerning, but it’s not the end of the world. It’s a worry, but manageable.
Pottier said that, for now, the biggest impact would be on South Africa’s reputation as a whole.
“There’s just something about it (the greylisting) being officially pronounced that does take away the subjectivity of the matter,” he said.
Reputation aside, the real-world effect of the greylisting depends on how the rest of the world responds. Unlike a credit rating downgrade to junk, which forces some funds and investors to disinvest in a junk bond, a greylisting doesn’t come with any similar specific restrictions.
This means it is up to each country, institution, business or investor to decide how they will approach a greylisted country.
“We know, for example, that the EU and UK require countries that are on the grey list to be considered high risk, which creates an extra onus on their institutions, investors and banks to deal with jurisdictions like South Africa,” Pottier said.
In countries like the EU and UK, companies will have to do higher due diligence when dealing with high-risk jurisdictions. The FATF encourages this when dealing with greylisted countries – though it did not advise this approach with South Africa at this stage.
“We have to see how the rest of the world reacts – we don’t know right now,” Pottier said.
The big risks
Suppose these groups do decide to change how they approach South Africa. In that case, the most critical impact is the weakening of access to international finance and stunting the ease of doing business, Pottier said.
This can bleed through in a couple of ways: more questions will be asked, and more information will need to be furnished, and it will take a lot more time to do business.
While this is quite a broad scope – looking at the greylisting on a country level and how other nations deal with South Africa – it can also feed through to individual businesses and South Africans.
In effect, anyone who wants to transact across borders or is invested in a fund that trades in international stocks will be subject to the same impediments: more checks and balances and longer wait times for transactions to go through.
All of this comes at a cost, Pottier said.
This could reflect in direct costs – like charges for having to execute the greater due diligence – or through investors demanding a higher rate of return when pumping money into South African institutions.
A higher cost could be some financial institutions or businesses cutting ties to South Africa completely – which is particularly problematic, Pottier said.
“Access to the international banking and payment network really affects everything. All our multinational transactions rely on correspondent banks.
“Whenever you need to transact offshore, our local banks don’t have capabilities and jurisdictions, so they lean on correspondent banks. If their partner banks were to say they no longer wish to engage, that would put tremendous strain on multinationals wanting to do business internationally.”
He said it would also be a major detriment to the flow of trade. South Africa is a significant exporter of commodities – but it also imports a lot of materials that it needs.
“If we can’t transact with international counterparties, this is a major trade issue,” Pottier said. “It’s just a fundamental thing. Everything relies on transactions and access to global capital and free-flowing capital. That is the most impactful risk of greylisting.”
Pottier said this would impact everyone who deals with sending or receiving money offshore – from parents sending funds to their child at university in the UK to portfolio managers dealing in foreign stocks and equities.
“It would be reasonable to expect higher due diligence, more friction, and delays.”
The worst-case scenario
The longer South Africa stays on the greylist, the worse things get. Over time – as has been the case with South Africa’s move to junk status – economic metrics will gradually decline, and the country will see less investment.
With the South African economy being junked, the country has seen a significant outflow of foreign direct investment. According to Pottier, most foreign investment in the country is currently through bonds and equities, not money to invest directly in local companies or projects.
If South Africa stays on the greylist, however, over time, the costs of being able to transact and the impediments will dissuade even these investments.
“During a sustained period of greylisting – like junk status, state capture, load shedding, political instability, etc – we will continue to see a steady erosion of investment flows into South Africa,” Pottier said.
The lack of investor and business confidence will see the cost of borrowing grinding higher, which will affect the sovereign and economic growth.
This will affect the rand, driving costs higher. If you don’t have investment and growth in the economy, next on the list are jobs, with an already high unemployment rate ticking even higher.
Job losses bring more social ills and unrest, and so the country will continue to spiral.
At the bottom of this dark spiral – if South Africa outright fails to meet the necessary standards and shows no will or desire to improve – we could find ourselves blacklisted, making friends with the only other countries on the FATF’s blacklist: Iran and North Korea.
This, of course, is all just a risk – and according to Pottier, not a likely eventuality.
While these risks are part of the greylisting, Pottier said that there had been no indication from international markets – so far – that anything has changed.
“At this stage, we haven’t seen any reaction from other jurisdictions to our change in status, if we’re being honest.”
International markets have been doing business with South Africa for a long time, and have always known the risks of doing so, he said. South Africa is also an important, if not vital, player in the global marketplace.
“South Africa has sound financial institutions that have deep and long relationships in the global trade and financial system,” Pottier said.
“The fact that we have commodities under our feet that are critical to the world’s needs gives them every incentive to continue to do business with us. As long as we continue to harness resources and as long as we have multinational corporations with influence in all jurisdictions, it doesn’t strike me as an imminent risk.”
It is also in the FATF’s interests to work with South Africa and help it improve, Pottier said.
“It is not in anyone’s interest to have a country on the grey list, and especially not deteriorate further onto the black list.”
Long road ahead
But this doesn’t mean South Africa is in the clear and on an easy path to getting off the grey list.
According to Pottier, the National Treasury’s hopes of being off the greylist by 2025, or even sooner, are optimistic. This is because South Africa is still reeling from entrenched corruption and the active breaking down of key institutions – like SARS, the NPA, and the Scorpions, etc. – during the state capture years.
While the country has made strides in dealing with these issues – with SARS especially shining through with a turnaround that is making it one of the strongest institutions in the country again – its ability to prosecute agents of state capture is a sticking point.
“The thing that is being watched very closely is our ability to prosecute those linked to corruption and state capture in particular. To see some recovery of those illicit proceeds,” Pottier said. “Until that happens, very little can be done to bring us out of the greylist.”
However, even here, there is some hope.
Pottier said that not everyone involved in state capture needs to be brought to book to show progress – the state just needs to show some improvement. If some big fish can be caught and prosecuted before the deadline, a speedy exit from the grey list can still be done.
The latest budget giving additional resources to the National Prosecuting Authority and the South African Police Service are also good signs and signal positive intent to tackle this sore point, he said.
“From a financial soundness, regulation and implementation point of view – we are really good. We’ve seen a raft of changes. Our authorities do a fantastic job of oversight of financial institutions. It’s all sound,” Pottier said.
He said that investors and any South Africans concerned about the greylisting should take all of this into account before getting too bogged down in the gloom and doom surrounding the move.
The reality for South Africa is that there are so many global factors at play that tend to overshadow any SA-specific impacts – and this bigger picture should always be considered, he said.
“When we talk to our clients about greylisting and the market volatility that it brings, we always boil it down to the three principles that really matter,” he said.
These are a well-diversified investment portfolio, sticking with investments long-term and avoiding attempts to time the market, and controlling the things that are within your control.
Most of the factors at play in the current situation are out of any investor’s control, and the effects and impact are yet to be determined, he said.