South Africa’s heightened global risk status due to greylisting 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.
Prof Raymond Parsons, economist from the North-West University (NWU) Business School, in commenting on the decision by the Financial Action Task Force (FATF) to greylist South Africa, says although it has been widely expected for some months, it is bad news that South Africa’s present vulnerable economy can do without.
“Another red flag has now been raised. Being greylisted is not a label South Africa’s ‘preferred investment destination’ aspiration should now want to receive. The climate of doing business in South Africa will inevitably be adversely affected.”
He says the remedial legislative and other efforts by South Africa so far to avert this outcome have clearly fallen far short of what the FATF expected. Financial crime and money laundering will need to be tackled by South Africa much more vigorously soon, bearing in mind that the original 2021 FATF timeline was one year.
“Greylisting should therefore be high on the agenda of the expected reshuffled Cabinet, particularly at the criminal justice level, as South Africa has apparently now made ‘a high-level political commitment’ to work with the FATF to continue to fight money laundering. The prospects of soon reversing the FATF’s decision therefore hinge on early and prompt further action.”
According to Prof Parsons the good news is that the greylisting decision, having been widely anticipated, has already been largely priced in by the markets. Additional negative market reaction at this stage need therefore not be traumatic, but we must also watch what the credit rating agencies eventually make of it.
“Transaction costs of foreign borrowing will be negatively affected, more red tape will be needed by business, and some foreign investors may well be discouraged as the costs of doing business in South Africa are perceived to rise.”
He explains that while greylisting remains part of the elevated risks to South Africa’s economic outlook, it should, however, have a minimal impact on South Africa’s immediate economic performance, as other stronger forces are at present driving the economy.
The gross domestic product (GDP) growth forecasts in the recent Budget and by the South African Reserve Bank (SARB) over the next three years have already been cut substantially, bearing these various elevated risks in mind.
“Nonetheless, greylisting remains a highly retrogressive development for South Africa. The FATF message is clear: despite ‘work-in-progress’, South Africa must provide much more demonstrable evidence of its ability to get on top of money laundering, corruption and financial crime. This would then help to strengthen investment sentiment about South Africa, which is needed to underpin higher job-rich growth.”