The argument by the Organisation for Economic Cooperation and Development (OECD) that tightening South Africa’s wealth tax regime would rebalance ... generational inequality has a fundamental flaw: it targets a “flighty” base, says an expert from the African Tax Institute.
Being on the grey list means that a country has strategic deficiencies in its framework for anti-money laundering and combating the financing of terrorism (AML/CFT). The FATF found in 2021 that South Africa failed in 20 of the 40 FATF standards and had shortcomings in all 11 steps needed to combat money laundering. The FATF set a deadline of February 2023 to fix the problems or face possible grey listing.
Government steps to try to head off the risk include changes to money laundering legislation and the creation of an anti-money laundering desk within the National Prosecuting Authority. Critics have questioned why it took so long to prepare the legislative changes. A research report this month from the Intellidex consultancy estimates that South Africa now has an 85% chance of being grey-listed.
“We would expect grey listing to be negative for the rand, South African bonds and South African banks,” says Bradley Preston, chief investment officer at Mergence Investment Managers in Cape Town. He points to findings by Investec that the currencies of countries that are grey listed have depreciated by 4% on average over the first 150 days, and 8% over 300 days. Separate research shows that cross-border bank inflows drop around 15% when a country is grey listed, he says.
- Impacts would include “acute reputational damage” and higher costs of doing business and raising international finance, says Jee-A van der Linde, senior economist at Oxford Economics in Cape Town.
- While local assets have, to some extent, priced in the probability of a potential grey listing, a short-term reaction can still be expected, he says.
- “Bond yields might rise sharply for a brief period,” and currency depreciation is also a risk, he says.
Fitch Ratings recently said that a potential grey listing event will not change South Africa’s sovereign credit rating or outlook. Van der Linde argues that a massive capital exodus is unlikely. South Africa still enjoys “robust monetary policy credibility,” he argues. The country’s largest banks have risk-management frameworks which should allow them to navigate in such an environment as they operate in African countries that have been grey listed in the past, he says.
Meanwhile, “Russia’s self-sanctioning and frail macroeconomic fundamentals across the emerging-market world imply a fairly limited universe of alternative investment destinations,” he says. But being prettier than Putin is not likely to win South Africa many beauty contests. Investors could park their money in cash while waiting for better opportunities, or pull out of emerging markets altogether.
Historical evidence suggests that it’s easier to get onto the grey list than off it, Preston says.
- He points to IMF data on 84 instances of grey listing between 2000 and 2017, which shows that on average countries have stayed on the list for three and a half years.
- The shortest time on the list has been about eight months and the longest 13 years, but in about 80% of the instances a country remains on the list for at least two years.
Investors can and will find other emerging markets and asset classes if South Africa doesn’t get its money laundering act together.
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