Billions of dollars in fines owed by South African companies MTN and Standard Bank to Nigerian regulators could increase the risk to SA's financial system. This is according the South African Reserve Bank's (SARB's) latest financial stability review, released yesterday.
Nigeria's central bank in August demanded MTN repatriate $8.1 billion (R11 billion) to Nigeria, which the bank said the company had sent abroad in breach of foreign exchange regulations. The central bank alleged MTN used improperly issued certificates to transfer funds out of Nigeria, after the telecoms giant converted shareholder loans in its Nigerian unit to preference shares in 2007. MTN denies the allegations.
The Nigerian attorney general has also demanded $2 billion (R28 billion) in taxes relating to the importation of foreign equipment and payments to foreign suppliers since 2008. The central bank also penalised four banks, including Stanbic, a Standard Bank subsidiary.
The SARB said the repatriation claim and the $2 billion underpayment in tax amounted to approximately 100% of MTN's market capitalisation.
"Any potential impact on the South African financial system arising from this event will depend on the eventual resolution of the matters raised and MTN Group's ability to continue meeting its debt obligations, including those in the South African banking sector. Given the globally interconnected nature of the South African financial system, this could increase systemic risk."
MTN makes about a third of its annual core profit in the West African country.
"A potential worst-case scenario would be for the MTN Group to disinvest from Nigeria as a result of this event," according to the SARB, which added it would increase the MTN Group's exposure level to reputational risk.
MTN and Nigerian authorities are also locked in a court dispute over the transaction, with MTN trying to stop the central bank asking for the return to Nigeria of the $8.1 billion. On 30 October, a Lagos judge adjourned a hearing in the dispute to 4 December, while a separate hearing between MTN and the attorney general over an alleged $2 billion unpaid tax bill, is due to take place today in the same court.
Some analysts have cited the concentrated foreign currency funding risk posed by MTN and a clutch of other Johannesburg Stock Exchange-listed firms as a threat to the currency and the central bank's foreign exchange reserves.
The central bank said if there was a spill-over from the market turmoil linked to external debt and the foreign currency funding crunch that hit Turkey and Argentina earlier this year, SA could suffer sharp capital outflows and exchange rate depreciation.
The rand is already down around 15% against the dollar this year, while portfolio flows slumped dramatically in the first half as a local recession exacerbated the global flight from emerging markets.