South Africa felt the ramifications of being grey-listed immediately as stocks and the rand ended the week in turmoil after the Financial Action Task Force, an international financial crime watchdog, added the country to its grey list owing to concerns about its capacity to fight financial crime.
The rand weakened 0.21% and plunged to R18.49 against the US dollar from its open on Friday of R18.24/$1, the lowest since early November last year, as investors worried about the country’s prospects of getting off the grey list.
Stocks also tumbled to a seven-week low as the JSE All Share index lost 2.6% to 76 938 on Friday, pushing the index’s losses almost 3% for the week, after resources and banks lost favour.
Being placed on the task force’s grey list means South Africa will be subject to increased monitoring amid concern about the higher risk for money laundering and terrorist financing.
The main implication of grey listing is that members of the international community are “warned” that conducting business with the impugned country could facilitate terrorism financing and money laundering.
However, Investec chief economist Annabel Bishop said the grey listing in and of itself was not the end of the world for South Africa.
Bishop on Friday said the likelihood of grey listing had been building for longer than over the course of last year, with the event largely factored in.
“The rand has weakened over the past several months on the expectation that SA would be grey-listed, along with other factors such as the slower interest rate hike trajectory,” BIshop said.
“That is, the highly anticipated event has been priced into financial markets and in itself does not represent any necessarily increased chance of credit rating downgrade/s from the key agencies, with the events entirely separate.
“The rating agencies have also noted the prior likelihood of SA being grey-listed and again do not believe, on its own on a standalone basis, that the grey listing of SA is credit negative.”
In its report on Friday, the task force concluded that South Africa had a solid legal framework for combating money laundering and terrorist financing, but significant shortcomings remained.
“In particular, the country needs to pursue money laundering and terrorist financing in line with its risk profile, including by proactively seeking international co-operation, detecting and seizing illicit cash flows, and improving the availability of beneficial ownership information.
“Authorities need to make better use of the financial intelligence products provided by South Africa’s financial intelligence unit. The country should also improve the application of the risk-based approach by obligated entities and supervisors.”
Earlier this month, South Africa made a high-level political commitment to work with the task force and the Eastern and Southern Africa Anti-Money Laundering Group to strengthen the effectiveness of its anti-money laundering and countering the financing of terrorism regime.
Since the adoption of its mutual evaluation report in June 2021, South Africa has made significant progress on many of the report’s recommended actions to improve its system, including by developing national anti-money laundering and countering the financing of terrorism policies to address higher risks and newly amending the legal framework for TF and TFS, among others.
North-West University Business School economist Professor Raymond Parsons concurred that the grey listing had already been largely priced in by the markets, and additional negative market reaction at this stage need not be traumatic.
However, Parsons said that, although the grey listing was widely expected for some months, it was bad news that SA’s present vulnerable economy can do without.
“SA’s heightened global risk status, unfortunately, dents an investment profile already grappling with factors such as the negative impact of aggressive load shedding, lack of energy security, ongoing ‘junk’ status and other uncertainties,” Parsons said.
“Another red flag has now been raised. Being grey-listed is not a label SA’s ‘preferred investment destination’ aspiration should now want to receive. The climate of doing business in SA will inevitably be adversely affected.”
The government institutions on Friday committed to actively work with the task force and Eastern and Southern Africa Anti-Money Laundering Group to swiftly address all outstanding deficiencies and strengthen the effectiveness of the anti-money laundering and countering the financing of terrorism policies regime.
The National Treasury was very optimistic about the situation, saying that there were no items on the action plan that related directly to the preventive measures in respect of the financial sector.
The SA Reserve Bank said it would further strengthen its supervision and further enhance the dissuasiveness and proportionality of administrative sanctions issued.
Meanwhile, the Banking Association South Africa said it would do whatever it could, with other public and private institutions, to successfully implement the remedial actions and to ensure that South Africa was removed from the grey list as soon as possible.
The association said complying with the anti-financial crime requirements of task force was necessary for the integrity and stability of the South African financial system, and the country’s economy and people.
“Basa and its members will closely monitor developments, which may affect their operations or their customers and clients,” it said.
“South African banks already follow global best practice, and they will not be shut out of international markets. Most of the international correspondent banks already apply their own due diligence measures to South Africa.”
BUSINESS REPORT