The latest scandal to emerge from South Africa’s beleaguered police service reads like a bad thriller. But for investors who track capital flows, it is merely another line item in the risk assessment for emerging markets. An internal inquiry into corruption within the South African Police Service (SAPS) has collapsed amid allegations that investigators themselves accepted ‘gifts’ and were compromised by cocaine use. The UK, by contrast, has maintained its own standards, albeit with a weary shrug that says ‘we told you so.’
For the markets, this story is not about morality. It is about credibility. South Africa’s institutions have been on a downward spiral for years. The rot in the police force is a symptom of a broader malaise: governance that fails to enforce contracts, protect property rights, or stem capital flight. When the police cannot police themselves, what hope for the rule of law?
The failed inquiry is a gift to cynics. Transparency International’s Corruption Perceptions Index already ranks South Africa 72nd out of 180 countries, with a score of 43 out of 100. This is not a blip. It is a trend. Since 2010, the country has lost more than 10 points on the index, equivalent to a fire sale of trust. Meanwhile, the UK sits at 11th, with a score of 77. That gap is a spread that investors are pricing into the cost of capital.
But the real story is the capital flight. According to the IMF, South Africa saw net portfolio outflows of $1.3 billion in the first quarter of 2023 alone. That is money fleeing to safe havens. The UK, with its relatively robust legal system, is a prime recipient. Every time a scandal like this breaks, the yield on South African government bonds ticks up, and the rand weakens. Investors demand a premium for the risk that the next bungled inquiry might be about their investment.
Let us be clear: the UK is not immune to corruption. But the difference is institutional resilience. The UK’s Independent Office for Police Conduct might be slow, but it is largely independent. South Africa’s Independent Police Investigative Directorate is, by all accounts, a mess. When the watchdog itself needs a watchdog, you have a governance deficit that no amount of central bank rate hikes can fix.
Fiscal responsibility? South Africa’s debt-to-GDP ratio is pushing 75%, and the government’s borrowing costs are climbing. The latest scandal will not help an upcoming bond auction. The UK, conversely, is struggling with its own inflation, but its gilt market remains the benchmark for stability. The spread between UK and South African 10-year bonds is over 5 percentage points. That is the market’s verdict on governance.
For the retail investor, this is a cautionary tale. Chasing yield in emerging markets is tempting when UK inflation is eating into returns. But every bungled inquiry, every gift accepted, every ounce of cocaine discovered is a reminder that the risk premium is not just a number. It is a reflection of reality. Stick with gilts, I say. The yield may be lower, but the sleep at night is better.
In the end, this story is about standards. UK standards are not perfect, but they are higher. And in a world of capital flight, that is the only currency that matters.
