S&P Global warns South Africa on greylisting
Could raise government borrowing costs
South Africa was notified by the UN-aligned global body two years ago that it had insufficient money laundering and anti-terrorism financing controls and risked being placed on the FATF grey list.
Credit rating agency S&P Global Ratings has warned that greylisting by the Financial Action Task Force (FATF) could raise government borrowing costs but will not immediately affect South Africa's credit rating.
And while it will raise transactional and compliance costs for the private sector, banks are not expected to lose their correspondent banking relationships in the event of greylisting, said the agency.
South Africa was notified by the UN-aligned global body two years ago that it had insufficient money laundering and anti-terrorism financing controls and risked being placed on the FATF grey list. South Africa's weaknesses were particularly marked in the failure to prosecute wrongdoers for corruption, such as occurred during the era of state capture. The body expects a progress report in October and will take a final decision at the FATF plenary in February.
S&P noted that foreign funding for the government would be particularly affected.
"Interest payments are already high, at about 17% of government revenue, and foreign participation in government securities makes up about 28% of total bonds. Sharp portfolio outflows could result in a steeper domestic yield curve and tightening domestic credit conditions. However, we believe the deep domestic capital markets, including large pension and other nonbank financial institutions, mitigate these risks somewhat," it said.
But South Africa is less exposed to external borrowings risk than many other jurisdictions as most government debt is rand-denominated. South Africa's net external asset position amounted to only 3% of gross domestic product (GDP) while foreign direct investment flows, which might be affected, were also low, averaging only 1% of GDP over 2011 to 2020.
Gaps
Should South Africa fail to deal with the gaps flagged by FATF in a "timely manner" its reputation could be weakened and its commitment to governance reforms questioned. This could then place SA's sovereign rating - which stand at 'BB-' foreign currency and 'BB' local currency – at risk.
When it comes to the banking sector, S&P says that the adoption of global best practices by the SA Reserve Bank should translate into sound governance at banks and the impact will be muted
"Based on our observations in neighbouring countries where they have operations, we expect South African banks will likely maintain their correspondent banking relationships. Large South African banks might also leverage their presence in Mauritius to raise and deploy foreign exchange funding. Mauritius and Botswana were removed from the FATF's greylisting in October 2021. Despite some reputational risk and potentially higher cost of compliance, we believe the implications of greylisting for the banking sector are likely to be muted."
S&P says it’s expects the impact on portfolio flows emanating from the risk of greylisting to be low. "South Africa benefits from deep domestic capital markets and a "risk-off" sentiment because of a greylisting could be mitigated by liquidity stemming from nonbank financial institutions and SARB's intervention," it says.
The impact on South Africa corporates is also expected to be muted, while on state-owned companies, the impact could be negative as the large funding requirements of some require relying on financing from international banks and debt capital markets.
And while it will raise transactional and compliance costs for the private sector, banks are not expected to lose their correspondent banking relationships in the event of greylisting, said the agency.
South Africa was notified by the UN-aligned global body two years ago that it had insufficient money laundering and anti-terrorism financing controls and risked being placed on the FATF grey list. South Africa's weaknesses were particularly marked in the failure to prosecute wrongdoers for corruption, such as occurred during the era of state capture. The body expects a progress report in October and will take a final decision at the FATF plenary in February.
S&P noted that foreign funding for the government would be particularly affected.
"Interest payments are already high, at about 17% of government revenue, and foreign participation in government securities makes up about 28% of total bonds. Sharp portfolio outflows could result in a steeper domestic yield curve and tightening domestic credit conditions. However, we believe the deep domestic capital markets, including large pension and other nonbank financial institutions, mitigate these risks somewhat," it said.
But South Africa is less exposed to external borrowings risk than many other jurisdictions as most government debt is rand-denominated. South Africa's net external asset position amounted to only 3% of gross domestic product (GDP) while foreign direct investment flows, which might be affected, were also low, averaging only 1% of GDP over 2011 to 2020.
Gaps
Should South Africa fail to deal with the gaps flagged by FATF in a "timely manner" its reputation could be weakened and its commitment to governance reforms questioned. This could then place SA's sovereign rating - which stand at 'BB-' foreign currency and 'BB' local currency – at risk.
When it comes to the banking sector, S&P says that the adoption of global best practices by the SA Reserve Bank should translate into sound governance at banks and the impact will be muted
"Based on our observations in neighbouring countries where they have operations, we expect South African banks will likely maintain their correspondent banking relationships. Large South African banks might also leverage their presence in Mauritius to raise and deploy foreign exchange funding. Mauritius and Botswana were removed from the FATF's greylisting in October 2021. Despite some reputational risk and potentially higher cost of compliance, we believe the implications of greylisting for the banking sector are likely to be muted."
S&P says it’s expects the impact on portfolio flows emanating from the risk of greylisting to be low. "South Africa benefits from deep domestic capital markets and a "risk-off" sentiment because of a greylisting could be mitigated by liquidity stemming from nonbank financial institutions and SARB's intervention," it says.
The impact on South Africa corporates is also expected to be muted, while on state-owned companies, the impact could be negative as the large funding requirements of some require relying on financing from international banks and debt capital markets.
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