Equities unfazed by greylisting

• Downgradings by credit agencies to subinvestment grade or junk status had graver consequences

SA’s stock market and financial services sector responded better to the country being greylisted earlier in 2023 due to lax money-laundering laws, than they would have in the event of a sovereign downgrade, a study by the Reserve Bank shows.

SA’s stock market and financial services sector responded better to the country being greylisted earlier in 2023 due to lax money-laundering laws, than they would have in the event of a sovereign downgrade, a study by the Reserve Bank shows.

The central bank in its financial stability review (FSR) published on Wednesday said that it had investigated the impact of the decision of the Financial Action Task Force (FATF) in February to place SA on its greylist on stock market returns using an event-study methodology. The study entailed an assessment of the country’s financial system, particularly the big banks and the large insurers, which also have systemic significance given their size.

The banks looked at were Standard Bank, Nedbank, Absa, FirstRand, Capitec and Investec. The insurance firms included in the study were Momentum, OUTsurance, Discovery, Clientele and Santam.

The result of this exercise found events such as the downgrading of SA by credit agencies to subinvestment grade or junk status had a greater effect on stock market returns than the greylisting.

“While the study did not necessarily control for proximal events, the event-study methodology employed demonstrated strong evidence that the FATF greylisting news, unlike sovereign downgrades, did not significantly impact on stock market returns.

“At a sectoral level, few event windows showed significant average abnormal returns for banks and insurers, suggesting that the actual event had a limited impact on the domestic financial system,” said the Bank.

“In the longer term, failure to resolve the deficiencies raised by FATF may result in SA staying on the greylist for longer, which could have adverse implications for the country’s risk premium, market depth and liquidity, mainly due to capital outflows from nonresident investors.”

Fears that SA will stay for an extended period on the greylist has greatly subsided in the past few months.

Business Day reported on Wednesday that the latest report by the FATF has indicated that SA has made positive progress in tackling technical compliance deficiencies in its anti-moneylaundering system.

Finance minister Enoch Godongwana said in the medium-term budget policy statement that the government expects to have dealt with all the deficiencies identified by the FATF by early 2025.

Since the greylisting, government departments and agencies — including the police, the Hawks, National Prosecuting Authority, Special Investigating Unit, State Security Agency, Reserve Bank, Financial Sector Conduct Authority and SA Revenue Service (Sars) — have been working to tackle deficiencies flagged by the FATF, he said. Godongwana said the country has addressed 15 of the 20 technical deficiencies in SA’s legal framework, and is making good progress with 17 of the 22 effectiveness action items.

The government is in the process of amending the country’s tax laws to allow Sars to share taxpayer information with the Companies and Intellectual Property Commission, the directorate for nonprofit organisations and the master of the high court to make it easier for authorities to curb moneylaundering activities.

The financial stability review cautioned that credit losses in SA’s banks emanate from the retail sector, which is potentially an “early-warning indicator of a distressed household sector. Furthermore, systemically important financial institutions appear to be increasingly reliant on NII [net interest income] to remain profitable under stress (particularly in high interest rate environments), which highlights a potential vulnerability in a scenario where increasingly nonlinear impacts of NPLs [nonperforming loans] on interest income exceed the benefits from the endowment effect in an interest rate hiking cycle.”

SA banks have been reporting record profits due to the endowment factor that flows from high interest rates, which are at a 14-year high. The flip side is that banks have also been reporting record bad debts.

The sector has since tightened lending criteria to rein in impairments.

FAILURE TO RESOLVE THE DEFICIENCIES RAISED BY FATF MAY RESULT IN SA STAYING ON THE GREYLIST FOR LONGER