The country must strike a careful balance between its political views and what is in the best interest of its economic and financial systems.
South Africa is a small economy that is well plugged into the global economic and financial systems from which it draws sustenance. This umbilical cord has its downside too, because it is a transmitter of problems such as the effects of the global financial crisis.
But the other risk relates to South Africa’s foreign policy. South Africa’s deep link with the economic and financial systems mean that the country can’t really strike out on its own on global matters. It must strike a careful balance between its political views and what is in the best interest of its economic and financial systems.
Here’s why. Let’s start with the financial system. South Africa’s financial sector — banking, insurance, as well as stocks, bonds, foreign exchange and money markets — is the biggest chunk of the country’s economy, accounting for more than 23% of economic activity as measured by GDP. That sector is also deeply embedded into the global financial system, whose epicentre remains the US. This position has benefited South Africa immensely over the years.
South Africa has deep and liquid financial markets, as well as a healthy banking sector. Both these factors have enabled the government to raise a big chunk of its debt from domestic markets.
In its latest review of the country, the International Monetary Fund (IMF) noted that most of the demand for local currency government bonds in 2021 came from unit trusts and hedge funds, as insurers, pension funds and non-residents stood on the sidelines. Uptake by banks, which have mopped up a bigger chunk of government debt in 2020 — the height of the pandemic — stabilised in 2021.
South Africa’s “sound financial system” was one of the factors that enabled it to withstand the effects of the Covid-19 pandemic. The IMF said: “Existing sources of strength (a flexible exchange rate, anchored inflation expectations, and a sophisticated financial system) help support the recovery.” By recovery, the fund meant economic recovery from the effects of the pandemic.
But this immediately limits which direction politicians can take, specifically on issues of global — read the US and Europe — concern. A good example here is the aftereffects of the 11 September attack in the US. Soon thereafter, the US cajoled the rest of the world into implementing a variety of measures, ranging from tighter financial regulation to stricter scanning of goods entering or leaving the ports.
In South Africa’s case, this meant introducing the Financial Intelligence Centre regime, as well as the South African Revenue Service having to invest in scanners at the ports. South Africa did well for several years but has recently fallen behind on tightening anti-money laundering.
As the IMF noted, the effectiveness of South Africa’s anti-money laundering and combating the financing of terrorism measures need urgent attention.
“The assessment found that the legal framework for anti-money laundering and combating the financing of terrorism is solid, but implementation needs improvements. Making better use of financial intelligence, proactively seeking international cooperation, detecting and seizing illicit cash flows, and improving both the availability of beneficial ownership information and the application of a risk-based approach are all necessary actions.”
If South Africa fails to tighten things up, it faces the risk of being placed under “enhanced monitoring” by the Financial Action Task Force’s. As the IMF cautioned, such a step would have a potentially “negative impact on South Africa’s access to the international financial markets”. That would indeed be a disaster for the South African economy.
That sobering assessment by the IMF has since been followed by the announcement by the US treasury department that it designated individuals residing in South Africa as suspected of being associates of Isis-related entities. This prompted the minister of finance and his justice counterpart to commit to ensuring the country’s “full adherence to international commitments”.
The risk of South Africa being cut off from the international financial system is a constraint on its foreign policy choices. Obviously, one must bear in mind the difference between political grandstanding and what a government implements as its domestic economic and financial sector policies. However, there is always a risk that political rhetoric gets taken seriously because of the perceived weaknesses of a country’s anti-money laundering and the combating of the financing of terrorism measures.
On the economic front, South Africa has benefited from the sale of its minerals to the rest of the world. Just recently, the spike in platinum prices came in handy, enabling the South African Revenue Service to overshoot its projected revenue collection for the financial year that’s about to end.
This has enabled the minister of finance to extend the R350 a month social relief of distress grant by an additional 12 months. This is just one pointer of the benefits that flow from the country’s deep links with the global economy. Of course, those links are a conduit of negative developments as well.
For foreign policy, the country’s deep links with the rest of the world can be a constraint. It’s a constraint that requires the government to think things through carefully before charting a particular course of action.