Bottom Line:
- Greylisting has been awaited for several months, driven by the fact that the country has not done enough to act against money laundering activities.
- In particular, there has been insufficient evidence of people accused of money laundering and corrupt activities being brought to book. This is a function of a general decline in law & order in the country.
- Although the enactment of grey listing will not directly affect the economy unduly negatively in the short term, it raises the requirement for due diligence and bureaucratic processes in international financial and trade transactions.
- Implicitly this raises the cost of doing business in the country. It also acts as a deterrent to foreign investment which will ultimately contribute towards lower growth in the longer term.
The rand fell to new three-year lows on a real trade-weighted basis on Friday on the long-awaited announcement that South Africa would indeed be greylisted by the financial transactions monitoring organisation, the Financial Asset Task Force. This event had been awaited for several months, driven by the fact that the country has not done enough to act against money laundering activities.
It does appear as if the government awoke to the need to enact legislation to this end but did so too late. By the time the decision to greylist the country was taken, there were still a number of gaps in the legislation and enforcement thereof to prompt the move.
- In particular, there has been insufficient evidence of people accused of money laundering and corrupt activities being brought to book.
This is a function of a general decline in law & order in the country, in part manifested by crime statistics revealed the previous Friday, which showed double-digit increases in critical criminal activities such as murder, rape and violent robberies over the past year.
How big of a deal?
Greylisting could potentially be significantly negative – an IMF working paper published in May 2021 found that greylisting results in a “large and statistically significant reduction in capital inflows equivalent to 7.6% of GDP on average.” It is difficult to say exactly how much of this is entirely related to greylisting, and how much is related to the general economic malaise that usually accompanies a country being greylisted.
More realistically – the enactment of greylisting will not directly affect the economy unduly negatively in the short term. However, it raises the requirement for due diligence and bureaucratic processes in international financial and trade transactions. Implicitly this raises the cost of doing business in the country. It also acts as a deterrent to foreign investment which will ultimately contribute towards lower growth in the longer term.
The short-term negative impact is through the Rand’s depreciation which adds to inflationary pressures and the likelihood that the Reserve Bank will now be obliged to raise interest rates somewhat further than previously anticipated.
An allied reason for Rand weakness this past week is said to be the fact that South Africa held military naval exercises with Russia and China, raising the threat of the US pulling out of the Africa Growth and Opportunities trade treaty, which would see key South African exports to the US losing their tariff-free benefits.
Greylisting revoked
Media reports imply that the greylisting is likely to be temporary. Although the National Treasury expressed confidence that sufficient legislation would be put into place to see the greylisting process being revoked before too long, it is clear that there is insufficient coordination of law enforcement bodies in the country to ensure that this will indeed transpire.