South Africa’s greylisting by the Financial Action Task Force (FATF) is beginning to negatively impact the country’s businesses and the government’s ability to raise capital.
Business Day reported that Treasury director-general Duncan Pieterse said the country’s greylisting had increased the cost of its debt and its risk premium.
However, Pieterse said much of the impact of the greylisting was already priced into local assets before the FATF’s decision in February.
South Africa’s increased risk premium has also been exacerbated by the government’s widening fiscal deficit and growing debt burden.
The country will need to borrow over R500 billion over the next year, or R2 billion per weekday on average, to fund its current fiscal deficit and refinance maturing debt.
Low to no economic growth will likely result in increased unemployment and add to the cost of the government’s social support schemes.
This will put tremendous pressure on the country’s finances and potentially widen the existing fiscal deficit.
Apart from a growing debt burden, the risk premium has been driven up by load-shedding, logistics constraints, crime and corruption, and questions over the country’s foreign policy.
The rising risk premium has resulted in the demand for government bonds from foreign investors falling, with net outflows from the bond market for the year so far.
“When you’ve got more sellers than buyers, the price goes up, and when the price of bonds goes up, the cost of capital goes up,” Nedbank CEO Mike Brown said.
“That is negative for investment because investments have to meet a higher hurdle rate. That is a huge concern.”
The Treasury is not the only entity affected, with Standard Bank and Tiger Brands also noting the impact of greylisting on their businesses.
Standard Bank CEO Sim Tshabalala said the negative impact of South Africa’s repeated missteps is adding up and will make it more difficult for the country to grow.
Tshabalala singled out greylisting, in particular, as significantly impacting Standard Bank’s operations on the continent.
Greylisting makes it more challenging to do correspondent banking with global partners as “we are getting more and more questions”, Tshabalala said.
It has become more complex to do regular trade transactions as partner banks require more forms and more paperwork. This makes these transactions less efficient and more expensive for Standard Bank.
Correspondent banks are forced to ask more questions of South African banks and companies performing international transactions as regulation pushes them to gather more information now that South Africa is on the FATF’s greylist.
Issues such as greylisting “are a death by 1,000 cuts – they all add up”, Tshabalala said.
“Things that are negative about our country and diminish our status are happening slowly, but they add up. Greylisting is but one in a long list of things that create a negative perception of South Africa.”
Tiger Brands also said the country’s greylisting has impacted its business, resulting in payment delays for exports from South Africa.
The company produces its products throughout Southern Africa and exports them to 25 countries on the continent.
CEO Noel Doyle said that while customers make their payments on time, they take much longer to reflect on Tiger Brands’ books.
“It’s a timing difference, but it’s another complication in the export chain, particularly if you are exporting to another greylisted country. We never had those problems before […] so it feels like everything is getting complicated at the moment.”
The National Treasury is set to meet the FATF this week to report on how South Africa is progressing with regard to the 22 actions it has to implement to get off the greylist.