The South African Reserve Bank (SARB) published its second Financial Stability Review (FSR) of 2023 on 29 November. The FSR provides:
- an assessment of the stability of the South African financial system over the past six months;
- an identification and assessment of the risks to financial stability in at least the next 12 months;
- an overview of the steps taken by the SARB and the financial sector regulators to identify and manage identified risks and vulnerabilities in the financial system; and
- an overview of the recommendations made by the SARB and the Financial Stability Oversight Committee during the period under review, and the progress made in implementing those recommendations.
“Systemic risk has remained elevated since the release of the May 2023 FSR. Idiosyncratic factors continued to contribute to systemic risk and weigh on the outlook for financial stability in South Africa. The most notable of these are government’s increasing debt levels and debt-servicing costs and the continued impact of being on the Financial Action Task Force (FATF) grey list,” the SARB says.
It said the impact of South Africa being placed on the FATF’s list of countries that are subject to increased monitoring is increasingly being felt.
“As a result of being added to the FATF grey list, the European Union added South Africa to its list of high-risk countries in June 2023. This requires financial institutions in the EU to apply enhanced due diligence to counterparties from high-risk countries when processing cross-border transactions, vetting clients, verifying the sources of funds, and tracking their use. The immediate impact has been delays in processing times and increased documentation requirements, leading to higher monitoring and reporting costs.”
The SARB said grey-listing was one of the reasons for the continued “record” outflows from the country’s capital markets.
Foreign appetite for domestic equities has been weighed down by low growth expectations, rising interest rates, heightened exchange rate risk, and idiosyncratic risks such as grey-listing and load-shedding. In the year to November 2023, non-residents were net sellers of R98.1 billion of domestic equities and bonds, much higher than the net sales of R43.4bn over the same period in 2022.
Impact on stock market returns
The FSR summaries the findings of a study into the impact of grey-listing on stock market returns. The study included comprehensive assessments of the South African financial system, particularly of the systemically important financial institutions (SIFIs) and the large insurers, which also have systemic significance because of their size.
The SIFI banks were Absa, Capitec, FirstRand, Investec, Nedbank, and Standard Bank. The insurers were Clientèle, Discovery, Momentum, OUTsurance, and Santam. The daily FTSE/JSE All Share Index returns and the returns for the banks and insurers were collected between 2022 and May 2023.
According to the study, events such as the downgrading of South Africa to sub-investment grade had a greater impact on stock market returns than did grey-listing.
“While the study did not necessarily control for proximal events, the event-study methodology employed demonstrated strong evidence that the FATF grey-listing news, unlike sovereign downgrades, did not significantly impact on stock market returns,” the FSR said.
“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.”
In the longer term, failure to resolve the deficiencies raised by the FATF may result in South Africa staying on the grey list for longer, which could have adverse implications for the country’s risk premium, market depth, and liquidity, mainly because of capital outflows from non-resident investors. Furthermore, geopolitical events interacting with this risk could have important macroeconomic and financial stability implications through the trade and financial (banking and insurance) channels, respectively, the SARB said.
(Refer to pages 49 to 51 of the FSR for more details of the study.)
