RUFARO NYAKATAWA: SA has work cut out bolstering financial services ecosystem

The past two years have created uncertainties that have caused investors to place more scrutiny on domiciling decisions, influenced by geopolitics in transition, the war in Ukraine, inflation rates and a looming recession. Such dynamics make it imperative for jurisdictions to strengthen their financial services ecosystems and create a business environment with sustainable economic prosperity in mind. Achieving this ambition will be a significant challenge for SA in particular.

On February 24 this year the Financial Action Task Force (FATF) added SA to its “greylist” following a series of regional reviews. Found to be “partially compliant” with 15, and “noncompliant” with five of the 40 FATF international standards for combating money laundering and terrorist financing, the FATF report led to one of Africa’s largest economies joining an unofficial list of countries with questionable financial probity.

According to a 2021 IMF working paper, the cost of being on the “greylist” is calculated as a 7.6% reduction in GDP. Being in this position complicates international financial operations and makes cross-border transactions more expensive.

In a recent interview President Cyril Ramaphosa stated that SA had made significant progress in addressing the FATF’s recommended remedial actions, through the establishment of an interdepartmental committee. The committee is supporting the relevant authorities to, among other things, demonstrate an increase in the investigation and prosecution of serious and complex money-laundering and terrorist financing, mutual legal assistance requests to other countries, the use of financial intelligence by law enforcement agencies, and the effective implementation of targeted financial sanctions.

While this is a positive step towards regaining the confidence of the investment community and other international finance centres, the negative publicity will affect SA’s reputation as a finance centre, resulting in reduced appetite for business relationships with the region. In addition, earlier this month the SA Revenue Service (Sars) introduced stringent regulations increasing disclosures of worldwide assets and tightening reporting standards for those emigrating financially or wanting to use the more than $500,000 annual investment allowance.

The reaction from Sars for greater regulatory demands, combined with operating in an increasingly complex and volatile geopolitical environment, clearly indicate the importance of compliance and good governance. For SA this will mean adapting to these evolving demands by making the necessary regulatory and compliance changes.

Another challenge faced by Africa that affects its growth and prosperity is the natural environment. Mounting evidence shows that Africa is the most vulnerable continent to climate change. A recent example of this was the devastation caused by the KwaZulu-Natal floods in April last year. Scientists have since calculated that global heating increased the likelihood of the flooding.

Environmental issues remain a huge threat to SA and the wider continent, but there are some indications of green shoots after landmark announcements made at the COP27 climate summit last year. The loss and damage fund established to rebuild the physical infrastructure of countries devastated by extreme weather was one important step forward.

Many African economies are also directly and indirectly exposed to the transition risks associated with climate change, amplified by the dependence on minerals, energy and mining. Hence the need for a change of attitude towards sustainability in asset management that will attract investments for economic prosperity within the capital markets space through effective environmental, social & governance (ESG) policies.

The results of PwC’s asset managers and institutional investors survey suggest that ESG assets are on track to constitute 21.5% of total global assets under management in less than five years as attitudes shift towards sustainability. It forecasts an increase in ESG-related assets under management to $33.9-trillion by 2026, from $18.4-trillion in 2021. The findings also point to a move away from ESG-orientated investments and towards embedding ESG principles into asset management processes. As the demand for ESG investment products rapidly increases, 30% of investors said they struggled to find attractive and adequate ESG investment opportunities.

How will African markets fare in the ESG space?

Is there opportunity for the funds and capital markets sectors to work together to develop regulations and metrics that will govern Africa’s financial landscape? Given that many of the capital markets across Africa are small and still in a developmental stage, a regional approach may be best: countries working together on green taxonomies, green bond guidelines and reporting regulations that will align with international practice and reflect local market conditions.

The extent to which ESG will inform domiciling decision-making for investors is yet to be realised, but what is clear is that adherence to the highest international regulatory standards to enable good governance, alongside a commitment to accelerate solutions that ultimately benefit the planet and us all, are already proving vital for economic prosperity. It is a pathway for African investors and those working with Africa to consider.

• Dr Nyakatawa is a business development consultant at Jersey Finance.