Companies and banks operating within greylisted countries face considerable challenges in accessing international debt markets at favourable rates, leading to higher borrowing costs and limited access to debt financing. These obstacles can have severe and long-lasting effects on the financial health and growth prospects of businesses. The case studies of Ethiopia and Pakistan illustrate how being placed on the FATF greylist can hinder corporate debt financing, making it difficult for companies to fund their operations and expansion plans.
Ethiopia Ethiopia was greylisted by the FATF in 2013 due to concerns about its weak anti-money laundering and counter-terrorism financing (AML/CFT ) measures. The impact of the greylisting on the country's debt market was severe, with the volume of new bank loans declining by 60% in 2013, according to the World Bank. Additionally, the cost of borrowing increased, with interest rates on corporate loans rising from an average of 10% in 2012 to 16% in 2013.
The higher borrowing costs had a severe impact on businesses in Ethiopia. The increased cost of borrowing reduced their profitability, which made it more challenging for them to invest in growth and expansion. This, in turn, impacted economic growth in the country, as businesses were unable to expand and create jobs. The increased borrowing costs also made it difficult for some businesses to service their debt, which led to a rise in non-performing loans. This, in turn, had a severe impact on the banking sector, which saw an increase in loan defaults and a decline in profitability.
Pakistan
Pakistan was greylisted by the FATF in 2018 due to concerns about its weak AML/CFT measures. The impact of the greylisting on the country's debt market was also severe, with the volume of new bank loans declining by 19% in 2018, according to the State Bank of Pakistan. Additionally, the cost of borrowing increased, with interest rates on corporate loans rising from an average of 7.4% in 2017 to 10.4% in 2018.
The higher borrowing costs had a severe impact on businesses in Pakistan, particularly small and medium-sized enterprises (SMEs). The increased cost of borrowing reduced their profitability, which made it more challenging for them to invest in growth and expansion. This, in turn, impacted economic growth in the country, as businesses were unable to expand and create jobs. The increased borrowing costs also made it difficult for some businesses to service their debt, which led to a rise in non-performing loans.
South Africa: Banks under pressure
While it is difficult to predict the exact implications of a FATF greylisting on South African debt markets, one of the more certain implications will be the pressure that will be placed on South African banks. Here are some ways that can be impacted by a FATF greylisting referencing the case studies in Ethiopia and Pakistan:
Restricted Access to International Markets:
A FATF greylisting can lead to restrictions on international financial transactions involving banks in the affected country, limiting their ability to conduct business with international counterparties. This can lead to reduced access to international markets, making it more difficult for banks to obtain funding or provide financing to their customers.
Increased Regulatory Scrutiny:
Banks in a greylisted country may face increased regulatory scrutiny from local authorities and international regulators, leading to higher compliance costs and operational risks. They may need to implement additional measures to ensure that they are meeting AML and counter-terrorism financing (CTF) requirements, which can be time-consuming and expensive.
Higher Risk Perception:
Banks in a greylisted country may be perceived as higher risk by international counterparties, leading to increased borrowing costs and reduced access to financing.
Mitigating the Risks to South African Corporates
Here are some ways that South African companies can mitigate the risks of a potential FATF greylisting on their debt prospects:
- Diversify Funding Sources: The primary tool available to South African companies to reduce their debt risk is to reduce their reliance on local banks and international debt markets by diversifying their funding sources. There are a multitude of non-bank debt funding options available to South African corporates, including accessing loans from a broad range of institutional investors and non-bank financial institutions.
- Highlight Anti-Money Laundering Controls: Companies can differentiate themselves by highlighting their internal AML controls and policies to potential lenders. This can help to mitigate the risks associated with a FATF greylisting and demonstrate to lenders that the company is committed to addressing these risks.
- Maintain Strong Credit Ratings: Larger South African companies can maintain strong credit ratings by demonstrating sound financial management practices, meeting debt obligations on time, and communicating effectively with creditors. This can help to mitigate the impact of a potential FATF greylisting on their debt prospects.
- Stay Informed: Companies can stay informed about the latest developments regarding FATF greylisting and other regulatory changes that may impact their debt prospects. This can help them to take proactive measures to mitigate risks and adapt to changing market conditions.
Moore is a leading financial advisory firm that provides innovative solutions to help South African corporates navigate the risks associated with FATF greylisting. Our team of debt experts are assisting our clients with diversifying debt sources as well as providing up-to-date market intelligence and analysis on the latest developments regarding FATF greylisting and other regulatory changes that may impact their debt prospects. Our clients are consequently able to make informed decisions about their financing strategies and adapt to changing market conditions.