The Impact of Greylisting in South Africa

GREYLISTING

South Africa now joins other African nations such as Tanzania, Mozambique and the Democratic Republic of the Congo – which were all greylisted during the FATF plenary meeting in October 2022.

The greylisting comes despite a last-ditch attempt by the South African government for fast-track rafts of legislation in the latter months of 2022 to try and address the shortcomings identified by the FATF in 2021.

How did markets react?

The greylisting was largely priced into the markets following the finance ministry’s and related officials’ indications that it was likely to happen. The rand has been trading under pressure all week but caught its breath following a better-than-expected budget speech on Wednesday.

The rand traded R18.42 on Friday (24 February) following the Financial Action Task Force (FATF) officially adding South Africa to the global grey list.

This marks the rand’s worst levels against the US dollar since May 2020 and only slightly worse than the levels seen in November 2022.

Impact and Consequences

The impact of the greylisting on South Africa remains to be seen – but there will be consequences. The potential consequences of greylisting are that other countries must treat SA with a heightened level of suspicion. Several countries require their institutions to apply “enhanced due diligence” of SA counterparts. In practice this means more frequent assessments, requests for more details on sources of funds and procedures, more senior management engagement with foreign counterparts. That is if those counterparts will do business with South Africans at all.

It could effectively mean transaction costs will go up for SA businesses and individuals — in the form of fees, time of senior management, increased search time for counterparts who will handle SA business and documentation required for compliance. This is certainly bad for growth, though putting specific numbers on it is hard.

The channels that will officially be affected will be limited. The impact is going to be on payments through foreign banks, as well as official flows from multilaterals and counterpart governments. There will not be a big impact on portfolio capital flows, for example. But there is also a general reputational impact — one that will be far more expensive than putting SA on the sleeves of a UK football team.

How does SA reclaim credibility?

The challenge SA faces is how to get off the greylist as fast as possible. SA can request a reassessment within 18 months. Decisive action can turn things around as what was done in Maurtius.

Mauritius took a blow when it was greylisted in February 2020. The country’s GDP dropped by 1% in the first year of its listing, and businesses suffered delays in conducting their operations across borders.

However, the Mauritian government responded decisively. It swiftly reinforced existing Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) laws and worked closely with the private sector, which also showed great commitment.

In October 2021, FATF members visited Mauritius and met the government, financial sector associations and bank representatives. Soon afterwards, the FATF reported that it was satisfied with Mauritius’s progress in reinforcing its dirty money framework and removed the country from its greylist.