By Lehlohonolo Lehana.
Financial services firm PwC says South Africa has a more globally integrated financial system, with a more open economy, and greater foreign investor participation, as a result, it must be treated uniquely.
In its latest Economic Outlook report for South Africa, PwC said that historically when a country is greylisted, there is a significant drop in total capital flows.
However, the fact that South Africa has a more globally integrated financial system when compared to other countries that have been previously greylisted, it is difficult to estimate the potential impact on the overall economy, it said.
“Research by the International Monetary Fund (IMF) shows that in the 89 emerging and developing countries greylisted during 2000-2017, this action resulted in a drop in capital flows equal to 7.6% of GDP over a period of nine months.”
“For example, foreign direct investment (FDI) inflows declined by an average of 3.0% of GDP while portfolio inflows declined by 2.9% of GDP. In the case of South Africa, the economic impact of greylisting depends substantially on the seriousness with which authorities are perceived to be acting to address the FATF’s concerns.”
PwC said that there have been a diverse array of impacts on businesses as a result of the greylisting:
- Planned foreign investments have been suspended or deferred.
- Foreign financial institutions impose stricter checks on transactions to/from the country.
- Increased transactional, administration, compliance, and auditing costs associated with enhanced levels of monitoring.
- Negative impact on the stock market and non-listed company valuations.
South Africa was added to the international financial watchdog Financial Action Task Force’s (FATF) greylist on February 24 this year. The country has committed to addressing the strategic deficiencies identified by the FATF within agreed time frames.
Ultimately, the greylisting made it makes it more difficult for businesses – especially multinationals – to do dealings with South Africa.
Before its current report, PwC warned that being greylisted could raise the cost of financing and trading with global partners for companies based in South Africa.
The decision would also lead to additional funding source requirements for businesses and NGOs, which would increase costs and delay transaction execution, the group warned.
PwC said that in response to the listing, private companies need to have context-specific solutions to circumvent the aspects of the greylisting such as strategic expansion, capital raising, and any generally increased cost of doing business.
“Companies operating as financial intermediaries across jurisdictions may be asked to understand independent risk assessments to enable their counterparties to gain assurance that their controls/frameworks are aligned with global standards and to prevent such counterparties from exiting these relationships,” PwC said.
“Where companies have been pulled into the scope of regulatory requirements, these entities will have to assess the specific impacts and ensure that they take steps to enhance their current control environments and frameworks to address their new regulatory expectations,” it added.