S&P Global Ratings says SA’s potential greylisting by the Financial Action Task Force (FATF), an action that would raise transaction, compliance and interest rate costs for local firms, is likely to hurt state-owned enterprises (SOEs) the most.
Paris-based FATF, an intergovernmental body that assesses countries’ ability to combat illicit financial activity, gave SA until October to come up with a credible plan to address gaps identified in its anti-money laundering and combating the financing of terrorism (AML-CFT) framework. Failure to do so could see SA placed on a greylist of countries seen as being at higher risk of financial crime when the group holds its follow-up review meeting in February 2023.
S&P said SA’s failure to pursue cases tied to state capture and efforts to cover up illicit cross-border payments were behind the country’s poor AML-CFT scoring in the FATF’s initial assessment, which was conducted jointly with the Eastern and Southern Africa Anti-Money Laundering Group. The weakened capacity of the SA Revenue Service, the National Prosecuting Authority and governance gaps at SOEs had further undermined the country’s AML-CFT framework.
“We expect the impact of a greylisting on private sector SA corporates to be largely benign. Entities with mainly SA operations are typically funded by domestic banks and nonbank financial institutions,” S&P said.
“The implications for public sector entities could be more severe, however. Greylisting could raise investor concerns that concerted efforts to improve governance and oversight may prove ineffective against rooting out corrupt practices within the largest SOEs.
“SA’s domestic markets are not large enough to cater to the funding needs of the country’s largest SOEs, which also rely on financing from international banks and debt capital markets, as well as SA development finance institutions.”
The ratings agency said that while greylisting would raise the government’s foreign funding costs, this was unlikely to significantly affect SA’s sovereign creditworthiness. Sharp portfolio outflows could also result in a steeper domestic yield curve (higher rates) and tighter domestic credit conditions.
“However, we believe the deep domestic capital markets, including large pension and other nonbank financial institutions, mitigate these risks somewhat,” S&P said.
The ratings agency also said it expected the effects of a possible greylisting on SA’s banking sector to be “muted” even though local lenders might suffer some reputational risk and potentially face higher compliance costs. Nevertheless, the prevalence of cash transactions due to SA’s large informal sector and indirect exposure to other sectors with less rigorous AML-CFT management than the banking sector could pose some risks to local lenders.
“While banks’ digital transformation has contributed to embedding AML-CFT requirements into their risk management, the financial sector is indirectly exposed to gaps from the private sector, which might have weaker understanding and management of these risks,” S&P said.
“Based on our observations in neighbouring countries where they have operations, we expect SA banks will likely maintain their correspondent banking relationships. Large SA banks might also leverage their presence in Mauritius to raise and deploy foreign exchange funding.”
Mauritius and Botswana were removed from the FATF’s greylist in October 2021.
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