Greylisting’s impact on JSE returns

South Africa’s greylisting will have an insignificant impact on JSE returns, with events such as the country’s downgrade to junk status having a much larger impact. 

This is feedback from the Reserve Bank, which outlined the impact of greylisting on South Africa’s financial sector in its Financial Stability Review released last month. 

South Africa was added to the Financial Action Task Force’s greylist on February 24, 2023, due to shortcomings in its anti-money laundering (AML) and combating the financing of terrorism (CFT) measures. 

The Reserve Bank warned that this designation could lead to increased scrutiny and costs for South African businesses and potential financial instability risks. This will worsen the longer the country stays on the greylist. 

The South African financial system was examined closely, especially systemically important banks and large insurance companies, alongside the performance of the JSE All Share Index. 

The study revealed that the country’s greylisting did not materially impact its borrowing costs, as South Africa’s debt servicing costs have grown due to structural economic issues. 

The International Monetary Fund (IMF) points out that South Africa’s unique challenges, such as state capture, corruption, weakening institutions, unreliable electricity supply, and erosion of the rule of law, contribute to higher borrowing costs.

Similar factors resulted in the consistent weakening of the rand over the dollar over the same period. 

Using data from Bloomberg, the study also examined the impact of South Africa’s greylisting on the performance of the JSE and, in particular, systemically important financial institutions. 

South Africa’s large banks, including Absa, Capitec, FirstRand, Investec, Nedbank, and Standard Bank, were analysed with large insurers such as Momentum, OUTsurance, Discovery, Clientele, and Santam. 

The Reserve Bank’s research paper investigated the impact of a greylisting event on stock market returns from an analysis of the performance of other global exchanges that had been placed on the list.

The study revealed that South Africa’s greylisting had an insignificant impact on the country’s financial institutions, their stock price performance, and the overall performance of the JSE All Share. 

It emphasised that events such as South Africa being relegated to junk status, persistently low economic growth, geopolitical tensions, and the government’s growing debt burden have greater impacts on the local financial sector and the stock market. 

The Reserve Bank also said that much of the impact was already priced into South African assets. 

However, it warned that if South Africa fails to address the shortcomings identified by the FATF, it could remain on the greylist for an extended period. 

This could negatively affect South Africa’s risk premium, market depth, and liquidity, primarily due to capital outflows from foreign investors. 

Moreover, the interaction of geopolitical events with this risk could result in greater financial instability. 

Source: SARB, Cumulative Abnormal Returns (CARs) of the JSE


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