South Africa is grey listed – what now?

On Friday, 24 February 2023, the Financial Action Task Force (FATF) added SA and Nigeria to the global grey list. The FATF has identified countries on this list as having deficiencies in their money laundering and terror financing practices. SA joins Albania, Barbados, Burkina Faso, Cayman Islands, Democratic Republic of Congo, Gibraltar, Haiti, Jamaica, Jordan, Mali, Mozambique, Nigeria, Panama, Philippines, Senegal, South Sudan, Syria, Tanzania, Turkey, Uganda, United Arab Emirates and Yemen. Countries on this list are at risk of being placed on the blacklist, which can have significant economic consequences. At the moment, the Democratic People’s Republic of Korea, Iran and Myanmar are on the FATF’s blacklist.

The FATF said that SA had made progress on the 67 recommended actions identified in 2021. In its most recent assessment, in January 2023, the strategic deficiencies were reduced to eight. SA seems to be clear from a regulatory point of view but lacks effective implementation. We need to address these deficiencies by no later than the end of January 2025.

What has the impact been so far?

In currency, bond and equity markets, the impact of the FATF’s grey listing decision was muted. Figure 1 below shows that the rand has been weak this year, depreciating by 7.83% against the US dollar. On the day of the announcement, the rand depreciated by 1.12% against the dollar, due to dollar strength.

Source: IRESS

Figure 2 shows that South African bond yields have been volatile over the same period. Bond yields pushed higher (implying a capital loss in the short term) towards the end of last year, which could be attributed to the Phala Phala controversy. Yields rose gradually leading up to the grey listing announcement. On the day of the announcement, the shorter end (five-year yield) spiked, while the 10- and 30-year yields moved lower. Arguably, grey listing had been priced in, but global themes such as the direction of global interest rates, sticky global inflation and the possibility of a recession had a greater impact leading up to the decision.

SA’s grey listing should not be regarded as a non-event, because if these deficiencies are not addressed, long-term consequences can be significant. Being on the grey list can negatively impact a country’s capital flow, increase compliance costs, hamper access to international finance and create a further disincentive for offshore companies to deal with SA.

Where to from here?

We trust this event will lead to increased action that willwill build stronger, more effective anti-money laundering and counter-terrorism practices. Political will is required to get the country off the grey list. We have been given a clear set of recommendations to address the deficiencies identified by the FATF, and it is important to take action to avoid being placed on the black list.