South African has been greylisted. What does that mean for us?
South Africa was greylisted on Friday and is under increased scrutiny by the Financial Action Task Force
Greylisting damages South Africa’s reputation in the global community
Government has committed to take further steps to rectify the situation
We believe markets have, to a large extent, priced in the announcement and further credit downgrades are unlikely
At PortfolioMetrix we avoid knee-jerk reactions and trust our investment processes - no portfolio changes are required at this stage
What it means to be ‘greylisted’
When a country is added to the grey list, it means that it is under increased scrutiny by the Financial Action Task Force (FATF), an intergovernmental organisation founded to combat money laundering and the financing of terrorism. The primary purpose is to ensure that compliance standards are improved and that a more robust process is in place to prosecute offenders. South Africa has been added to that list because the FATF identified deficiencies in its systems and procedures that would assist in the identification and prosecution of financial crimes. It signals to the global community that there is an increased risk of money originating from South Africa being used to support such activities and that wrongdoers are not being held accountable.
The implications for South Africa
The greylisting in isolation is not the end of the world; however, it comes at the same time as risk-averse global capital markets and South Africa amid an energy crisis. Therefore, being added to the grey list does further damage to our reputation in the global community and makes us less attractive to foreign investors. Some of the potential consequences include:
international financial institutions limiting the scope of business that may be conducted with South Africa, or even completely preventing business from being conducted;
increased difficulty for local institutions and businesses to obtain foreign funding;
increased compliance and administrative formalities when doing business with South Africa;
local business being less competitive globally due to increased compliance formalities;
possible economic penalties being imposed on South Africa by FATF member countries;
potential decrease in investment into and trade with South Africa.
Steps that have already been taken to address the FATF concerns
On a positive note, government had begun to address the lengthy list of factors identified by the FATF. The Investigating Directorate was established in April last year to focus on the identification and prosecution of anyone involved in state capture activities. Various pieces of legislation have been amended to enhance the fight against money laundering and the combating of the financing of terrorism. Government has also committed to work with the FATF to remedy the deficiencies it has identified in South Africa’s related governance procedures.
What remains to be done?
The FATF has identified eight areas that require attention. These include broad categories such as ‘risk-based supervision of identified risks’, ‘accurate and up to date beneficial ownership information by competent authorities’ and ‘improving the investigation and prosecution of activities related to money laundering and the financing of terrorist activities. In the recent Budget Speech, Finance Minister, Enoch Godongwana, reaffirmed that the outstanding deficiencies would be addressed.
Mauritius found itself in a similar situation in February 2020. Less than two years later, in October 2021, it was removed from the grey list. It can be done. When the FATF places a country under scrutiny, it means that country has committed to resolving swiftly the clearly identified deficiencies within agreed timeframes.
What it means for investment portfolios
The addition of South Africa to the grey list seemed to be a foregone conclusion and, as a result, appeared to have been priced into the market some time ahead of Friday’s announcement. Furthermore, the major credit rating agencies have noted that the grey listing is unlikely to result in further credit downgrades.
Given the predictability of the event, we believe there is no need to make any adjustments to portfolios post the announcement. Since 2020, we have sought opportunities to further diversify portfolios from the concentrated risk of South African asset classes. Our journey began by materially increasing our offshore exposure in discretionary portfolios and we followed this last year by increasing our offshore exposure in the Regulation 28 portfolios as soon as regulations allowed. At the time, we believed that we were able to construct portfolios that quantitatively and qualitatively had less expected risk but did not necessarily sacrifice on expected returns. We believe this is still the case.
At PortfolioMetrix, our focus is on maintaining well-engineered portfolios that, in conjunction with expert guidance from advisers, supports the implementation of well-diversified investment solutions for investors that aim to produce reliable outcomes. Our global investment team, supported by specialist fund managers, continues to monitor the investment landscape. Should we believe changes are required, they will be communicated timeously.
Click here to read further thoughts from Phil Bradford who was quoted in a recent CityWire SA article.