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South Africa has been placed on a global financial watchdog’s so-called grey list denoting nations with shortcomings in tackling illicit financial flows, a move that will, according to Bloomberg, scar the country’s international reputation and may raise costs for banks and asset managers. The decision was announced by the Financial Action Task Force. Nigeria was also added to the list. It places South Africa in the same category as Mozambique, the Democratic Republic of the Congo, Haiti, and Syria. Denker Capital co-founder, Kokkie Kooyman, said it would not affect the man in the street, and even the banks would hardly notice it, but there would be more scrutiny on other avenues by which money left or entered the country. Reacting to the 2023 budget, Kooyman said there had been a government mind shift on the privatisation of electricity. The increase in South Africa’s debt-to-GDP ratio meant the country was slowly moving towards Ghana, Zambia, or Egypt. He also weighed in on the sudden exit of André de Ruyter. – Linda van Tilburg
Watch the interview here:
Extracts from the interview below:
Greylisting, perceptually bad and will retard growth prospects
I hoped that we would escape it, that enough had been done by the various authorities, although too late. They started on it too late, but the Minister of Finance’s comments as part of his budget speech certainly indicate that he puts the probability very high that we will be greylisted. In fact, he almost said it as a matter of fact, and that we must be ready for when it happens. Now, obviously, we’ve been talking a lot to the CEOs and CFOs of the banks and as many people as we can – and perceptually it is bad. You get categorised with a group of countries; you are seen not to be fighting one of the most important and serious crimes in the financial world in terms of money laundering and what brings about. But the bottom line is, I don’t think that the man on the street will notice a difference and even the banks. In fact, one said any of the correspondent bankers would now have to start assessing South Africa after years of business. You’d actually worry about them and have to derate them. Most of those counterparties that do business with us know South Africa. They already know the risks that are there in any case. Greylisting is just a fact or ticking the box of a fact that’s already present. So, everybody is aware, and they don’t think it will make much of a difference immediately in the cost of finance. But certainly, it will make new money more difficult to come in. It certainly will retard our growth prospects. For every business or individual or fund manager who wants to invest in South Africa it increases the amount of hurdles in coming into South Africa because this is another explanation you’ve got to do while you are investing in this country that is greylisted. So, it’s not good, but I don’t think it will have that much of a noticeable immediate effect.
Banks are prepared for greylisting, but third parties will have extra scrutiny.
I’m sure they’ve been preparing for it by talking to the counterparties, the correspondent banks that they deal with and making sure that their counterparties are aware of the risk of us being greylisted and how it would affect them and how they look at us and assuring them. If we can just go back quickly as to why we are being greylisted. It’s not because of the banking sector, it’s because of the third parties. It’s all the other kinds of avenues by which money leaves and comes into the country. For instance, property transactions via estate agents, gold exchanges, coin exchanges, that type of thing. So, those are the ones if you were dealing with them, you’d be worried about because there is going to be extra scrutiny. But for the banking sector, I’m sure they’ve just been talking to their counterparts saying, as you know, we’ve been doing this. These are our safeguards; our computer systems do this, this, and that. I think that they are ready.
A government mind shift on privatisation of Eskom
We are like the proverbial boiling frog with the waters getting warmer and warmer. The situation in South Africa regarding Eskom, Transnet, crime, and our policing is just almost monthly getting worse. We just seem to be getting used to it… and so the Minister of Finance within that deteriorating context, delivered a budget that I think was on the margin good and expected by most investors offshore and locally in that it was inevitable that the state was going to directly assume some of Eskom’s debt onto its balance sheet. It was more a quantum of do they take all of it and I know that parties are saying that they should take all of the debt, or do you take some? There are obviously consequences both ways. As I said in a previous interview, the most important thing is that Eskom is being privatised by stealth and that the Minister of Finance is now helping that by making tax breaks available on both sides shows that the Government has made a mind shift. They have certainly made this shift, saying we are not going to solve this problem. It’s unlikely that within the next ten years that Eskom will be able to provide all the electricity South Africa needs. So, let’s make sure businesses and the population can become independent to a large extent from Eskom.
Debt to GDP ratio increases to a very high 70%, we are going slowly towards a Ghana, Zambia, or Egypt.
If you then look at the debt that was expected, but obviously, in terms of what he did with debt relief and then the debt relief of other partie, Denel etc; it does increase our debt-to-GDP ratio to a very high 70%. The threshold, the really bad number from which you often don’t return, is 80%, and we are slowly creeping closer and closer to that. He’s been rescued by the fact that our exports, and commodity prices did well. So, if you exclude interest costs from the budget, we’ve got a budget surplus. But now we must remember that the interest burden is getting bigger and higher and the interest rate is increasing. So, you still have to service that debt, and that takes money away from everything else, be it in schools, safety, whatever – it takes it away from the government. For the financial sector, there are a few implications. Number one, interest rates will stay high with a debt-to-GDP ratio like that, funding costs for those who want to invest money into South Africa, they can demand a higher interest rate because of the increasing risk that we could default on our debt at some stage. Not now, but if you’re lending five or ten percent on your money, that risk increases. So, we are going towards, say a Ghana, a Zambia, or an Egypt, slowly, slowly.
Loans for solar power incentives are good for the financial sector in the short term
You saw that starting to happen in the last quarter of the year, but especially in the last quarter of last year, it started increasing dramatically, and it’s continued. The bank sector is helping South Africa privatise Eskom in that way. I saw a graph from Goolam Ballim of Standard Bank last week which showed the import of lithium batteries, and it just went through the roof and so the banks are financing that. Remember, if you’re investing and you’re lending money to make yourself more productive and through that, productivity either can be more effective or produce more and especially if it comes to exports or substituting imports, then that’s pretty good lending – this is defensive lending. It’s lending that is trying to keep businesses alive. So, from that point of view, it’s just a deterioration. We’re putting a lot of capital to work just to be able to do business. It’s structurally not a good move but short term, it’s good for the financial sector.
On André de Ruyter’s dramatic Eskom exit
I think if you just imagine yourself in your own business and you are working hard, and your wife and your children are suffering because of all the effort you put in, and your boss goes and publicly says you’re useless and you’re actually working against the business. I think those frustrations are now coming true, and if a guy like that says something as serious as that, I will give it the benefit of the doubt, and it’s very worrying, and it’s more worrying as to how the government is going to react to that, and they would most likely try to squash it. But it does show the underlying problem also of criminality just increasing.
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