South Africa risks being grey listed by the Financial Action Task Force (FATF). These news have been in the headlines and topped the agendas of many boardrooms for a few weeks already. South Africa’s financial regulators have had to step up their game to try and assist in the global war on money laundering. This week we explore what it means to be grey listed.
Key themes for this week include:
FATF fighting a silent war
Wall Street kicks off September in the red
Uranium prices hit a four-month high
All eyes are on United States (US) jobs data
ALL HANDS ON DECK
South Africa has navigated its fair share of storms over the past few years, including state capture, loadshedding, COVID-19 and the subsequent downgrades from ratings agencies that followed. Now, just as the National Prosecuting Authority (NPA) starts to prosecute some high-profile individuals for their hand in the State Capture debacle, the global financial watchdog, FATF, has turned its attention to South Africa for all the wrong reasons.
While the work of the Zondo commission and the NPA has been exceptional in mapping out how State Capture took place, it also uncovered a major problem in the South African financial sector. Evidence from the commission highlighted how the South African financial sector, even with anti-money laundering controls and the Financial Intelligence Centre Act (FICA) regulations, failed to prevent, not only the illicit flow of funds from state capture, but billions of rands worth of illegal transactions for businesses and individuals in the private sector.
There are many psychological and socio-economic reasons which explain why individuals in the financial sector are susceptible to bribery. There is also a debate on how increased regulation has led to further circumvention of the law, but these require a much longer conversation. What we are faced with now, however, is the immediate need for intervention to ensure that South Africa escapes the consequences of being grey listed. The country needs to implement measures that meet global standards and restore the trust in the local banking and financial sector.
The South African government is moving swiftly. It has started introducing urgent changes to some laws, with the Finance Minister, Enoch Godongwana, tabling changes to the FICA Laws, which cover issues like anti-money laundering and combating terrorism financing legislation, in parliament, which will now allow for public comment. The swift endeavours by government and Treasury, specifically, demonstrate the commitment of government to resolving the shortcomings within our financial sector.
However, regulatory changes will not solve the problem. They only serve to increase an already costly burden of compliance and red tape in businesses. The reality is that when it comes to illicit transactions, it is not the entire sector or even an entire institution which is responsible, it is a select few individuals wilfully bending the rules, often with no regard for the consequences, and it is those individuals who have to face the law.
Money laundering and the financing of terrorist activities has a huge and detrimental cost on the world’s economy. The estimated amount of laundered money, globally, is pegged at between $800 billion to $2 trillion per annum, and yes, while illicit activity lines pockets and contributes to economies in their own distorted fashion, the cost of these activities is tremendous. Money laundering and terrorist-financing activities directly contribute, not only to the obvious ailments such as sex trafficking, addiction, wars and death, they also negatively impact the economic viability of a country.
Money laundering directly undermines legitimate private sector entities, the integrity of financial markets, economic stability, leads to the loss of revenue in both private and public sector, and condemns a country to a reputation of a poor investment destination. The fight against money laundering is not only in the interest of government and regulators, but in the interest of every hardworking citizen doing their best to earn an honest living.
DATA IN A NUTSHELL
The Economic Sentiment indicator in the Euro Area fell to 97.6 in August, from a downwardly revised 98.9 in July, and slightly below market forecasts of 98. This marks the lowest reading since February 2021 and comes amid significant weakening of confidence in industry and services, with both consumers and retailers feeling more pessimistic. Meanwhile, preliminary estimates showed that annual inflation rate in the euro area accelerated to 9.1% in August from 8.9% in July, topping market forecasts of 9%, The inflation rate broke a new record high, as energy cost remains elevated and food prices continue to accelerate.
The number of job openings in the US rose by 199 000 from a month earlier to 11.2 million in July of 2022, while markets had expected it to drop to 10.45 million. It was the first increase in job openings after three consecutive months of slight declines, reflecting persistent tightness in the labour market amid worker shortages.
The Caixin China General Manufacturing PMI (purchasing managers index) unexpectedly declined to 49.5 in August, missing market forecasts of 50.2, and points to the first contraction in the sector since May. The latest print reflected the impact of widespread COVID-19 lockdowns and electricity shortages. Output grew at its softest pace in three months, while both new orders and buying levels fell for the first time since May. Employment also fell for the fifth month running.
South Africa’s private sector credit advanced by 7.09% year-on-year in July, missing market expectations of 7.28%. This marked the thirteenth straight month of increase in private sector credit, even as interest rates continue to normalise off record-low levels. South Africa’s trade surplus rose marginally, but less than expected to R24.76 billion in July from R24.23 billion in the previous month. Imports declined 5% month-on-month to R152.47 billion, amid reduced purchases of mineral products, vehicles and transport equipment, base metals, and original equipment components. South Africa’s top import partners were China, India, Germany and the US. Meanwhile, exports fell by a softer 4.1% to R177.23 billion, due to fewer shipments of precious metals & stones.
NEW MONTH, NEW LOSSES
Wall Street started September in the red, after shedding just over 4% in August, as concerns over rising interest rates continue to linger. The highly anticipated Non-Farm Payroll report, due out today, will be keenly watched to gauge the strength of the labour market. The Dow Jones was down almost 300 points on Thursday, and both the S&P 500 and the Nasdaq lost more than 1%. Energy and material stocks were among the worst performing sectors. Tech shares were also under pressure after Nvidia and AMD were instructed by the US government to halt exports of certain chips to China.
The FTSE 100 fell 1% on Thursday, its lowest in nearly six-weeks, following a 1.9% loss in August, pressured by commodity-linked stocks amid a drop in oil and copper prices. Among single stocks, Reckitt Benckiser’s shares were down 5% after the Anglo-Dutch consumer goods company announced that CEO, Laxman Narasimhan, will step down at the end of the month, after a three-year tenure at the head of the table.
Bourses in Europe also kicked off September in the red, with the DAX falling almost 2% and the STOXX 600 hitting a seven-week low after shedding 1.5%. European-based Stocks ended August off nearly 5% lower.
The Nikkei 225 Index slipped 1.53% while the broader TOPIX Index lost 1.41% on Thursday, sliding to its lowest levels in almost a month, as a hawkish outlook on US interest rates and weak global economic data dampened investor sentiment.
The JSE FTSE All Share index retreated by 1.7% on Thursday, shedding over 6% in the last five sessions as the increasingly negative outlook on the global economy continued to put pressure on demand for resources mined in South Africa. Mining stocks listed on the Johannesburg Stock Exchange sank nearly 3% in the Thursday trading session, with Impala Platinum tanking 7%, amid lower prices for bullion and base metals.
POWER CONCERNS DRIVES URANIUM SKYWARD
Uranium futures rose above $53 per pound on Thursday, their highest since mid-May, as the uncertainty regarding energy supplies across the world drove governments to double down in alternative energy sources. Japanese Prime Minister, Fumio Kishida, ordered the development of new nuclear reactors to strengthen the country’s energy security and lower carbon emissions. The Japanese Nuclear Regulation Authority has also approved 17 existing reactors to be reactivated, while six reactors have already restarted operations. The move signals a historical pivot, as the country regains confidence in nuclear energy following the 2010 Fukushima power plant meltdown. In addition, California Governor, Gavin Newsom, proposed extending a $1.4 billion loan to extend the life of the Diablo Canyon Power Plant until 2025, while Swiss politicians launched a petition to revise the country’s nuclear energy policy and avoid power plant shutdowns.
Brent Crude futures dipped more than 2%, to trade toward $93 per barrel on Thursday, after closing out the third consecutive monthly decline, as recession worries and a weakening demand outlook overshadowed concerns around tighter supply. Brent Crude has lost nearly 20% in the past three months as major central banks aggressively raised interest rates to combat surging inflation. Ongoing economic concerns over the Chinese economy, the largest importer of Brent Crude, also dampened the demand outlook.
Gold prices weakened past the key support level of $1 700 an ounce on Thursday, hovering at their lowest level in six weeks, pressured by the US Federal Reserve’s (Fed’s) firm commitment in fighting inflation with aggressive policy tightening. Cleveland Fed President, Loretta Mester, said on Wednesday that the policy rate will have to be moved “somewhat above 4%” by early next year and stay there in order to bring high inflation back down to the Central Bank’s target, and that she does not anticipate rate cuts in 2023. While gold is widely considered as a hedge against inflation and economic uncertainty, higher interest rates raise the opportunity cost of holding non-yielding bullion, which dents its appeal.
CURRENCIES IN FLUX
The US Dollar Index rose above 109 on Thursday after a volatile few sessions this week. It climbed back toward its highest levels in 20 years as the US Fed appears intent on keeping interest rates higher for longer . Markets are currently priced for a third consecutive 75 basis point interest rate hike in September. The US nonfarm payrolls data, due today is expected to show that the economy added 300 000 positions in August, which will strengthen the case for more aggressive rate hikes.
The Euro managed to claw its way back above parity, trading just above $1, as investors weigh growth concerns and prospects that the European Central Bank (ECB) will continue to raise interest rates. Recent data showed the inflation rate in the euro area increased more than expected this month, raising the odds the ECB will also deliver a 75 basis point rate hike when it meets next week. However, several ECB members have recently advocated for a larger hike. However, concerns of an imminent recession in Europe continues to build, as the energy crisis intensifies, weighing down on the common currency.
The British pound remained on the backfoot, weakening past $1.18, and reaching its lowest level since March 2020, as the outlook of soaring inflation threatened to hurt the pound’s purchasing power and further hurt the British economy. Citi Bank economists forecasted inflation will surge to 18.6% by the start of 2023, due to soaring wholesale gas prices, supported by expectations that the country’s retail energy price cap could reach £5 816 by April, compared to £1 971 currently.
The South African rand was caught in the crossfire of a strengthening dollar, to trade at R17.00/$ on Thursday, nearing lows last seen on 20 July, as Fed Chair, Jerome Powell, suggested that the US Central Bank will keep raising interest rates to tame inflation, bolstered the greenback.
The rand is trading at R17.30/$, R17.23/€ and R19.98/£.