South Africa is in the dog box
South Africa has been hit with a barrage of geopolitical snafus that have painted the country in a bad light within the international community.
From president Cyril Ramaphosa “accidentally” announcing the country’s withdrawal from the International Criminal Court (ICC) to the more egregious failure by government departments to convince the Financial Action Task Force (FATF) that it has dirty money under control – brand South Africa has taken a big knock in 2023.
Meanwhile, the country continues to bear the shame of having power go out multiple times a day for hours at a time – killing businesses and investor appetite – and maintains its friendly and flirtatious relationship with Russia, while it wages war in Ukraine.
Business leaders and risk experts have warned that any one of these things spells bad news for South Africa. But in combination, it puts the country squarely in the dog box.
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Russian friends
Until fairly recently, the South African government has managed to clumsily dance around the biggest geopolitical issue of the past year. When Russia invaded Ukraine in February 2022, the actions of the Kremlin were denounced by so-called “Western nations” and were met with criticism even from those who would historically remain neutral.
South Africa’s response was initially one of condemnation, with International Relations Minister Naledi Pandor first calling for the immediate withdrawal of Russia from Ukraine. However, this was hastily retracted and replaced with a statement far more neutral in tone.
Since then, as Russia’s war wages on for more than a year, the tone from Pretoria has shifted even further from its initial condemnation. On paper and at an official level, South Africa remains neutral and calls for a diplomatic resolution to the “conflict”.
Meanwhile, the government happily plays host to Russian dignitaries, addressing them as “friends”, allowing shipping vessels to dock in the cover of night, and sanctioned aircraft to land at military air bases.
When the International Criminal Court issued a warrant of arrest for Russian President Vladimir Putin’s over his alleged war crimes in Ukraine, the governing ANC thought the best option would be to withdraw from the ICC.
Following an ANC National Executive Committee meeting last week, president Ramaphosa boldly announced that the party had adopted the resolution to withdraw from the ICC, and that this would be communicated to those in government.
The next day, Ramaphosa was forced to walk back on the statement, with the ANC saying that he “misspoke”. As it stands, South Africa intends to remain a signatory to the Rome Statute that empowers the ICC and will continue to campaign for equal and consistent application of international law.
However, the unhappiness with potentially being forced to take action against Putin is apparent. The Russian president is expected to visit South Africa for a summit in August this year, where members of the BRICS (Brazil, Russia, India, China and South Africa) will come together.
South Africa’s outright refusal to condemn Russia and its war in Ukraine has drawn criticism from both inside and outside the country.
Business leaders and risk experts have flagged South Africa’s cozy relationship with Russia as one of the biggest risks to the economy and businesses that rely on trade with Western nations.
South Africa has hundreds of billions of rands tied up in trade with the US, UK and anti-Russian countries in Europe.
South Africa’s economic ties to Russia, meanwhile, are paltry by comparison.
Greylisting
South Africa’s love affair with Russia is doing no favours for the country’s reputation as being a hotspot for shady dealings.
On top of well-publicised corruption allegations and chronically high crime stats, the country was dealt another blow this year when the Financial Action Task Force (FATF) determined that not enough was being done to counter money laundering and terrorism financing.
In February, South Africa was officially greylisted by the FATF, making it harder for multinationals to do business across borders and serving a massive blow to the country’s reputation as a place of business and safe trade.
Although the government attempted to fast-track new laws to address findings and recommendations made by the international watchdog, the FATF still greylisted the country.
In its assessment of South Africa over the last few years, the FATF uncovered severe regulatory and compliance holes in the country’s legislation that allowed for illicit terrorism financing and money laundering to run rampant.
PwC’s Economic Outlook for April revealed that in countries that are greylisted, capital flows dropped significantly, such as foreign direct investment inflows, which declined by 3.0% of GDP on average.
The financial services firm outlined the varied impacts on businesses as a result of the greylisting:
- Planned foreign investments have been suspended or deferred.
- Foreign financial institutions impose stricter checks on transactions to/from the country.
- Increased transactional, administration, compliance, and auditing costs associated with enhanced levels of monitoring.
- Negative impact on the stock market and non-listed company valuations.
In response to the ruling by the FATF, the government has downplayed its effects on the economy, with Ramaphosa stating that it is concerning but ‘less dire’ than some suggest.
However, analysts have noted that to get off the greylist, the government needs to not only address the holes in legislation that open up the path for dirty money, but also ensure that investigating and prosecuting authorities are equipped to bring those responsible to book.
Given South Africa’s track record for successfully putting the corrupt in jail, the concern is that the country will be on the grey list for longer than anyone in government would like to admit.
Load shedding
The elephant in the room that has made itself quite at home in South Africa is load shedding.
Severe and frequent power outages have – to put it lightly – ravaged the local economy, destroyed businesses, disrupted daily life, and torn down the government’s ability to deliver service and address basic needs.
According to the South African Reserve Bank (SARB), load shedding has all but wiped out the country’s prospects for economic growth in 2023, and has also contributed significantly to rising inflation.
This has not gone unseen by international financiers and investors.
The International Monetary Fund’s (IMF’s) April update on the world economy showed that South Africa is flirting with a full-year recession with growth prospects of just 0.1% for 2023.
In March, global rating agency S&P Global revised the country’s credit rating outlook to stable from positive – citing load shedding as the main driver of poor economic growth.
Feeding into the suspicions and scrutiny South Africa is already under, the National Treasury attempted to mitigate the prying eyes of ratings agencies by exempting Eskom from reporting irregular, fruitless and wasteful spending in its financial statements for a period of three years.
According to the Treasury, this was done in a bid to help Eskom secure a clean audit – as adverse findings would impact its credit rating and borrowing costs, exacerbating its financial crisis.
Following the widespread backlash, the Treasury withdrew its proposal – however, it still intends to bring it back. This will put South Africa right back in the spotlight with ratings agencies.
A ratings downgrade can have various negative effects on South Africa, including increasing the cost of borrowing for individuals, businesses, and governments, lowering investor confidence, reducing access to capital markets, affecting currency exchange rates, and damaging a country’s reputation, potentially leading to a further slowdown in economic growth.
Despite the shelving of the proposal to exempt reporting certain financials, the Organisation Undoing Tax Abuse (Outa) said that hiding such financials would likely have the opposite effect – putting rating agencies and lenders on high alert when dealing with the power utility.
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