South African Rand Wobbled in Adverse Market Conditions after Greylisting

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The South African Rand underperformed many other comparable currencies in adverse international market conditions ahead of the weekend and following a "greylisting" decision from the Financial Action Task Force (FATF).

South Africa's Rand was lower against all G20 currencies except the Korean Won on Friday as Dollar exchange rates rose across the board and stock indices tumbled across the globe. 

An upside surprise from an important measure of U.S. inflation added to the losses and risk aversion among investors in noon trade but the Rand had already been an underperformer in the hours before. 

"South Africa is widely regarded as being one of the primary financial hubs on the African continent," says Anthony Colegrave, a London-based partner in the capital markets group at White & Case LLP, a global law firm specialising in financial litigation and law. 

Above: South African Rand performance on Friday relative to G10 and G20 currencies. Source: Pound Sterling Live. To optimise the timing of international payments you could consider setting a free FX rate alert here.

"With that comes the expectation that State and private institutions adhere to globally acceptable standards of governance and oversight with regard to financial matters  – particularly concerning the implementation of AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism) measures," Colegrave writes in a Thursday briefing for interested readers

Colegrave is a specialist in both English and South African law financial matters in both the capital markets and banking spaces, and is "used to working on big cross-border and multi-jurisdictional projects from both a derivative and regulatory perspective."

The FATF describes itself as "the global money laundering and terrorist financing watchdog. It sets international standards that aim to prevent these illegal activities and the harm they cause to society," and South Africa is itself a sovereign state member of FATF alongside many other countries.

South Africa was placed onto "Jurisdictions under Increased Monitoring (i.e. "grey list")," along with Nigeria and 21 other countries on Friday, while there is a total of only three countries on the other list of "High-Risk Jurisdictions subject to a Call for Action (i.e. "black list")."

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"It should be noted, the purpose of greylisting by FATF is not to destroy or damage a country, and it is not intended to make the economic environment more difficult, prevent flows of monies in and out of borders or bring impediments to legal businesses. Many banks are indeed well placed to help clients with what will amount to likely extra paper work and some delays," says Annabel Bishop, chief economist at Investec. 

Investec noted earlier this week that research from the International Monetary Fund (IMF) suggests countries often see lower capital inflows after inclusion on the list with the total loss of capital flow tending to average 7.6% of GDP. 

This includes foreign direct investment (FDI) and portfolio inflows, though inclusion on the list is not a permanent affair as countries can be removed from it following implementation of recommended actions. 

"The rand has weakened over the past several months on the expectation that SA would be greylisted along with other factors such as the slower interest hike trajectory and smaller quantum of hikes in SA than in the US. The likelihood of greylisting had been building for longer than over the course of last year," Bishop adds in a Friday research briefing.

Above: Pound to Rand rate shown at weekly intervals alongside USD/ZAR. Click image for closer inspection.