Understanding the threat of greylisting

There has been much talk among financial experts and analysts in recent months around the chance that South Africa may be grey-listed internationally.

According to Lynne Kimble from Silvertree Risk and Wealth Management, being grey-listed can have serious consequences for a country’s economy, but it is no need to panic.

According to Kimble, it is important to understand what it means for a country to be grey-listed:

However, capital flows will be subject to more complex due diligence procedures, which could have a cost. Also, domestic interest rates could be somewhat higher because capital from certain foreign institutional investors will no longer be available. The cost of funding government debt will increase and accessing green finance for the energy transition will become more complicated. The total impact of these costs is difficult to quantify but should be manageable.

The list is compiled by the Financial Action Task Force (FATF), an intergovernmental organisation that sets international standards for combating money laundering and terrorist financing.

In an extensive article on the subject, Sandy McGregor from Allan Grey (through whom, among others Silvertree invests for its clients) explains the consequences of greylisting.

She writes: Greylisting should not seriously impede foreign investment in South Africa. Private sector companies in South Africa are well regarded and have long-established financial links, which will continue to operate. Trade between South Africa and the rest of the world will continue, especially as the world needs South African raw materials. Legitimate investment abroad by South Africans will continue.

Anything which reduces inward capital flows has an adverse impact on the rand exchange rate. However, the market does not depend on rating agencies or FATF greylisting to decide whether a country is investable; it makes its own judgement long before these institutions make their pronouncements. For example, the market downgraded South Africa to subinvestment grade prior to the rating agencies. The impact of greylisting arises because certain institutional investors are precluded by internal rules or by rules imposed by regulators from investing in greylisted institutions. However, this will be of less importance than the principal determinants of the exchange rate, such as trade flows, international monetary policy and the behaviour of the South African government.

The key to reducing the adverse impact of greylisting is a convincing commitment by the government to continue to work with the FATF to address the issues that have been raised. An improving situation will be condoned. Mauritius got off the greylist within 18 months by displaying the necessary commitment.

Read the in-depth article, here: https://www.allangray.co.za/latest-insights/marketsand-economy/the-threat-of-greylisting/?utm_