OLD MUTUAL MULTI-MANAGERS – MARKETS IN A MINUTE – 27 February 2023
WHY IS THIS IN THE NEWS?
The global Financial Action Task Force (FATF) has placed South Africa on the list of “Jurisdictions under Increased Monitoring”, the so-called grey list. The FATF is a global body that sets legal, regulatory, and operational standards to combat cross-border criminal and terrorist funding activity and assesses how effective countries are in implementing these measures. In October 2021, the FATF announced its assessment of South Africa and found that despite the country’s sophisticated legal and banking system, there are significant implementation shortcomings. Despite a flurry of legislative and regulatory amendments over the past few months in response to these findings, it was a case of too little too late. South Africa will have to do further work on eight strategic deficiencies identified by the FATF.
WHAT IS THE IMPACT ON YOUR INVESTMENT?
Local markets wobbled on the news, but this coincided with the release of US inflation data that sent global markets lower. The grey listing announcement was anticipated and therefore largely priced in, in the same way as credit ratings downgrades tend not to move markets substantially at the point of being announced. The shortcomings and strengths of our institutions are well known and already broadly reflected in market pricing. Moreover, South African bonds and equities are priced in a global context and moved by global factors, such as the ongoing question marks over whether global inflation is truly subsiding.
The government has promised to address the identified shortcomings and South Africa should eventually join other countries that have managed to have grey-listing decisions reversed, notably Botswana, Mauritius, and even Zimbabwe. Grey-listing is unlikely to be permanent, and this is another reason not to expect a severe market reaction. Being on the grey list is also unlikely to impede the functioning of local capital markets. However, the FATF announcement does reiterate some of the negative sentiment on governance and lack of economic growth. South Africa needs to execute on the required changes as soon as possible.
WHAT IS OUR VIEW?
Grey-listing is yet another blow to fragile investor confidence and clearly hurts South Africa’s global reputation at a time when it is already on a low ebb. It places us in the same category as Haiti, Syria, Yemen, Myanmar, and South Sudan, hardly the company we want to keep.
In practical terms, it means that foreign entities will have to do enhanced due diligence on any dealings with South Africans. This adds time, energy, and costs to transactions, but should not necessarily prevent the transactions from taking place. Moreover, since the FATF advocates a risk-based rather than a tick-box approach, it implies that many foreign entities will have increased scrutiny of South African counterparties long before the grey-listing was announced. Therefore, the FATF decision is unlikely to have a significant negative long-term impact on the SA economy by itself. South Africa currently faces several challenges and needs to demonstrate a commitment to accelerate reform with the aim of boosting confidence and ensuring a recovery in the growth outlook.
There is some good news. While the FATF cares mostly about cross-border flows, money laundering and terrorism funding, the external pressure from the FATF means South Africa is improving the tools needed to fight against domestic corruption. This should ultimately be good for economic growth and can more than offset any short-term negative impact of being placed on the grey list.
Whilst every care has been taken in compiling the information in this document, the information is not advice and Old Mutual Multi-Managers and/or its associates, do not give any warranty as to the accuracy or completeness of the information provided and disclaim all liability for any loss or expense, however caused, arising from any use of or reliance upon the information. Please note that there are risks associated with investments in financial products and past performances are not necessarily indicative of future performances
Source : Old Mutual Multi- Managers
