In a significant development, South Africa has received positive recognition for its progress in rectifying technical compliance deficiencies in its anti-money laundering system, according to the latest report from the global Financial Action Task Force (FATF).
Key themes for the week
- US economy grows more than expected
- Equity markets reflect positive sentiment as we head into the final month of the year
- Gold set for second consecutive month of gains, while oil soars ahead of the expanded Organization of Petroleum Export Countries (OPEC+) meeting.
- Dollar ends week higher, despite a monthly loss
POSITIVE STEPS IN THE RIGHT DIRECTION
The FATF report, titled, South Africa: Follow-up report on technical compliance re-rating, highlights substantial advancements made by South African authorities in addressing the 20 technical compliance deficiencies identified in the 2021 FATF mutual evaluation report.
The FATF’s 2021 mutual evaluation report scrutinised South Africa’s legal framework and systems for anti-money laundering (AML) and combating terrorism financing (CTF). While the evaluation found South Africa deficient in 20 recommendations, it also noted compliance or substantial compliance with 20 other recommendations
In its October report the FATF formally re-rated 18 of the 20 deficiencies based on the progress made by South African authorities in the two years following the 2021 mutual evaluation. Of these, 15 deficiencies were upgraded to no longer deficient, indicating that 14 recommendations are now fully or largely compliant. One recommendation was deemed not applicable to South Africa. As a result of these re-ratings, South Africa is now considered fully or largely compliant (or not deficient) in 35 of the 40 FATF recommendations, including five of the six core FATF recommendations.
Despite this positive trend, South Africa still faces five deficiencies in technical compliance, including three that were upgraded from non-compliant to partially compliant. Two deficiencies have remained partially compliant since 2021. The South African authorities are actively addressing these remaining deficiencies, and it is anticipated that they will be deemed addressed in the next FATF follow-up report in October/November 2024.
The progress follows an application by South African authorities for the re-rating of technical compliance deficiencies after the enactment of key legislative amendments in late 2022. Two significant legislative amendments worth noting are the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, No. 22 of 2022, and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act No. 23 of 2022, which came into effect in early 2023, along with related regulations.
The FATF follow-up report underscores the expectation that countries address most, if not all, technical compliance deficiencies within three years of the adoption of their Mutual Evaluation Report. South Africa has demonstrated significant progress by addressing most of these deficiencies within two years.
It is essential to note that the follow-up report does not cover the progress made by South Africa in addressing the effectiveness deficiencies outlined in the action plan agreed upon during its greylisting by the FATF report in February 2023. Effectiveness deficiencies are crucial for South Africa to exit the FATF “greylist.” The progress in this regard is monitored separately through the FATF’s International Co-operation Review Group’s joint group process.
Cabinet together with the Justice, Crime Prevention, and Security Clusters have been overseeing the implementation of the action plan, with the Interdepartmental Committee (IDC) on AML/CFT playing a key role. The IDC-AML/CFT, chaired by the Director-General of National Treasury, comprises various government departments and agencies, emphasising a collaborative approach to address the challenges outlined in the action plan.
As South Africa continues to make strides in addressing deficiencies and implementing necessary measures, the focus shifts towards achieving effectiveness and ultimately securing removal from the FATF “greylist.” The ongoing commitment to compliance and collaboration across government entities signals a dedicated effort to strengthen the country’s AML and CFT framework.
GLOBAL MARKETS END NOVEMBER ON POSITIVE NOTE
As November draws to a close, global markets are reflecting a positive trend, with various indices showcasing notable gains and key economic indicators influencing investor sentiment.
In the United States (US), stock futures pointed to a higher end for the month, with S&P 500 and Nasdaq futures gaining approximately 0.3%, and the Dow Jones rising over 180 points. The three major US averages are poised to record their best performance since late 2022, signalling a positive turn as the US Federal Reserve’s (Fed’s) tightening campaign is likely concluding. The S&P 500 is up 8.5%, the Nasdaq has surged about 11%, and the Dow is up 7.2%.
In the United Kingdom (UK), the FTSE 100 remained stable after three consecutive sessions of losses. While oil and gas stocks saw marginal gains, the mining sector fell, with industrial miners and precious metals trading 0.3% and 0.9% lower, respectively. Notable stock movements included major retail and commercial bank, NatWest Group, rising by 1.8% following a J.P. Morgan upgrade, while footwear and clothing brand, Dr Martens faced a 22.5% drop due to a higher-than-expected decline in annual revenue and profits. The overall FTSE 100 index is on track for a 1.5% monthly gain in November, recovering from a 3.8% slump in October.
Frankfurt’s DAX 40 saw a 0.2% rise above the 16,200 mark for the first time since 1 August. Preliminary data from the eurozone indicated that inflation pressures in November cooled more than anticipated, heightening expectations that the European Central Bank (ECB) might cut interest rates as early as April 2024. German retail sales exceeded expectations, rising by 1.1% in October compared to the previous month. Despite this positive economic news, Germany’s jobless rate rose to 5.9% in November, its highest level since May 2021. Over the course of November, the DAX surged by over 9%, marking its best month since October 2022.
In South Africa, the JSE All Share Index showed a slight increase above 75,400 on Thursday. A relatively benign global interest rate outlook and signs of economic recovery contributed to this uptick. Investors absorbed data indicating the resilience of the US economy and looked ahead to US inflation data for insights into the Fed’s future actions. Domestically, attention turned to producer inflation data which aligned with market expectations and trade balance, that unexpectedly recorded a deficit of R12.7bn. Top performers included retailer, Spar Group, and property companies, Lighthouse Properties, and Redefine. Meanwhile, miner, Anglo American Platinum, and energy giant, Sasol, experienced declines of over 2%. The JSE is set to record an over 8% gain in November, fuelled by the expectation that major central banks have concluded their interest rate hiking cycles.
As global markets wrap up November, the overall sentiment suggests optimism, with various regions experiencing positive economic indicators and favourable stock performances. Investors remain attuned to key data points and central bank actions as they navigate the evolving landscape in the coming months.
OIL PRICES SURGE AS OPEC+ MEETING TAKES CENTER STAGE
Brent Crude futures soared above $83.50/barrel on Thursday, marking the third consecutive session of gains in anticipation of the crucial OPEC+ meeting later in the day. The focal point of expectations was centred around Saudi Arabia’s potential extension of voluntary supply cuts until at least the first quarter of 2024. Speculation also lingers on the prospect of OPEC+ collectively extending or intensifying supply cuts into 2024 to reinforce market stability. While Saudi Arabia has advocated for production quota reductions among members, to bring equilibrium to markets, a conclusive resolution remains elusive. Initially scheduled for November 26, the meeting faced a delay to November 30 due to a disagreement involving African producers, Nigeria and Angola, over output quotas. The uncertainty surrounding the OPEC+ decision has kept the oil market on edge, with traders closely monitoring developments that could sway global oil prices. The outcome of the meeting will likely influence not only the immediate trajectory of oil prices but also the broader energy landscape. Simultaneously, official data revealed an unexpected increase in US crude inventories last week, adding an additional layer of complexity to the global oil market dynamics.
In the realm of precious metals, gold maintained its strong position above $2,040/ounce on Thursday, poised for a second consecutive month of gains. This upward momentum is attributed to a weakening dollar and the prevailing sentiment that the Fed has concluded its interest rate hikes and may be considering easing measures in the coming year. Earlier this week, Fed officials hinted at the possibility of a rate cut in the coming months, citing cooling inflationary pressures. However, cautionary voices within the Fed warned against premature discussions on such matters. Market indicators now suggest an 80% likelihood of a rate cut at the central bank’s meeting in May next year. As investors await fresh remarks from Fed Chair, Jerome Powell, today, the precious metal market remains sensitive to shifts in monetary policy expectations. The interplay between OPEC+ decisions and central bank actions will likely dictate the near-term trajectories of both oil and gold markets.
CURRENCY-MARKET DYNAMICS
The US Dollar Index strengthened to 103.2 on the final day of November, benefiting from a weakening euro. The EU currency faced headwinds as inflation figures for the euro area fell below forecasts. Despite this short-term gain for the greenback, it is set to conclude November about 3% lower, marking its most significant monthly loss in a year. The dollar remains close to levels not seen since mid-August lows, reflecting increasing speculation that the Fed’s tightening campaign is concluding, potentially paving the way for interest rate cuts in the coming year. Traders closely analysed personal consumption expenditures (PCE) inflation readings, which stood at 3%, in alignment with market expectations.
The euro depreciated to below $1.092/€, driven by rising expectations that major central banks, including the ECB, may transition from tightening to implementing rate cuts in the upcoming year. Flash consumer price index data revealed a more substantial-than-expected deceleration in inflation across the euro area, including key economies such as Germany, Italy, and Spain. The eurozone’s core inflation rate gauge dipped to 3.6%, marking its lowest point since April 2022, and falling below the projected 3.9%. Despite these challenges, the euro posted a monthly gain of more than 3%, marking its most significant increase since November 2022.
Meanwhile, the British pound consolidated its gains above the $1.26/£ mark, reaching its highest level since late August. Investors digested hawkish statements from Bank of England (BoE) policymakers, including Deputy Governor, Dave Ramsden, who emphasised the need for a “restrictive” monetary policy to combat inflation. BoE Chief Economist, Huw Pill, reinforced the importance of maintaining a tight monetary stance. Recent data indicated a stabilisation in the UK’s private sector activity in November, surpassing market predictions, which further supported the pound. Additionally, the GFK Consumer Confidence Barometer improved more than expected in November.
In South Africa, the rand traded around R18.85/$, experiencing a decline during Thursday’s trading session. Robust growth figures from the US, combined with local challenges, such as severe port congestion and stage 6 load shedding, contributed to the rand’s fluctuations. Despite a significant rebound earlier in the week against a subdued dollar, the rand faced headwinds as November drew to a close.
As the currency market concluded November, the dynamics reflect a complex interplay of global economic factors, central bank policies, and regional challenges. Traders and investors will continue to monitor these elements closely as they navigate the evolving landscape in the upcoming months.
The rand is trading at R18.82/$, R20.53/€, R23.78/£.
Sources: Bloomberg, Trading Economics, Refinitiv, Investing.com and FATF Progress Report.