Momentum Investments economist Sanisha Packirisamy. Image: Supplied.
South Africa is set to find out the status of the greylisting decision by the global Financial Action Task Force (FATF) on Friday.
Momentum Investments economist Sanisha Packirisamy, below, explains what greylisting actually is and what it could potentially mean for the country:
When the global Financial Action Task Force (FATF) places a jurisdiction under increased monitoring (ie the grey list), it means that the country is actively working with the FATF to address apparent strategic deficiencies in its regimes designed to tackle financial crimes.
In our view, much of the responsibility for the weakening of South Africa’s (SA) criminal justice system lies with the previous administration’s subversion of democracy. During this period, the capacity of SA’s tax authority, intelligence agencies and crime-fighting and law enforcement bodies were incapacitated.
SA was given until November 2022 to prove it is remedying the country’s structural deficiencies when it comes to anti-money laundering and countering the financing of terrorism. If we fail to demonstrate satisfactory progress on these remedial actions by February 2023, a plenary vote of the FATF members will determine the fate of the country’s greylisting status.
Aside from technical factors, the decision to greylist SA depends on the FATF’s judgement of government’s political willingness to achieve sufficient progress in addressing the concerns highlighted in their report.
Although global empirical studies show mixed results on the impact of a greylisting event on a country’s capital flows, being greylisted could further impair the economy’s links to the global financial system, raise SA’s cost of capital and create an additional disincentive for offshore companies to deal with SA.
Nevertheless, with global themes likely to be a larger determinant of the outcome for SA financial markets, local idiosyncrasies, such as a greylisting event, may be overshadowed by high and sticky global inflation, tighter global financial conditions and a rising risk of recession in key markets. Moreover, it can be argued that a compendium of negative SA-specific factors has already been incorporated by local and global investors into elevated risk premia for SA asset classes, as reflected in cheap valuations.
In any event, we remain steadfast in our view that a well-diversified investment portfolio as encapsulated in our outcome-based investing philosophy provides the best possible protection against any unforeseen global or idiosyncratic market events that may cause short-term instability. Furthermore, history has shown that staying invested throughout any market turbulence has been the superior strategy for long-term returns.
Regardless of the outcome of the FATF’s decision to potentially greylist SA, we believe this yellow card warning should serve as a wake-up call for SA policymakers, regulators and law enforcement agencies to convince the country’s international counterparts it is worth their effort to maintain relationships in the interim as SA continues to build a more robust legal and compliance framework to remain competitive on the global stage.
BUSINESS REPORT