Land reform to add to battered rand’s woes

The emerging-market sell-off may have already battered SA’s rand, but it could get worse as traders fret about the government’s push for land reform that may have far-reaching economic consequences and is catching the attention of world leaders.

The currency plunged almost 10% against the dollar in August, its worst month in more than five years. Derivatives markets are signalling more pain to come as the economy enters a technical recession and contagion from crises in Argentina and Turkey spreads.

Traders are also increasingly nervous about the ANC’s plans for a constitutional amendment to permit expropriation of land without compensation.

Most investors agree land redistribution is crucial to tackle lingering inequalities. But they are concerned about a lack of detail and say it could undermine property rights, deter foreign investment and lead to penalties from other countries, according to Morgan Stanley and Standard Chartered.

“Land reform is emerging as one of the key issues and it’s clear markets remain nervous,” said Razia Khan, London-based head of African research at Standard Chartered.

Reflecting investors’ angst, the rand rallied on August 28 after legislators announced that they were withdrawing a bill on land expropriation. The surge ended barely 10 minutes later, once traders realised it was a procedural move and that the constitutional change was being dealt with separately.

“This type of reaction might well become commonplace ahead of the 2019 general elections,” said Nema Ramkhelawan-Bhana, the head of research at Rand Merchant Bank in Johannesburg.

Currency traders are bearish. The rand dropped 0.1% to 14.8724/$ at 7.51am in Johannesburg on Tuesday.

US President Donald Trump raised the prospect of SA being penalised when he tweeted on August 23 that he had told secretary of state Mike Pompeo “to closely study the South African land and farm seizures”.

UK Prime Minister Theresa May said in Cape Town last week that while she supported land reform, officials should “bear in mind the economic and social consequences”.

Under Trump, the US has ramped up sanctions against emerging markets, including Russia and Turkey, with the lira buffeted after Washington raised metals tariffs in August.

“It may have been a passing thought which Trump has already forgotten, or it might be the beginning of a theme for him,” said John Ashbourne of Capital Economics. “But Turkey’s experience highlights that even very limited sanctions would have a big market effect.”

'No land grab'

President Cyril Ramaphosa partially eased investor concerns when he wrote in the Financial Times that any constitutional change would not hurt the economy or the agricultural sector. Expropriation without compensation may be used in specific cases, for example when land is unused or buildings abandoned.

“This is no land grab,” he said. “Nor is it an assault on the private ownership of property.”

Still, the premium investors’ demand to hold SA debt rather than US Treasuries, known as the sovereign spread, climbed more than emerging-market peers in August, suggesting that his announcement of the plan at the end of July is weighing on SA’s assets.

Part of the problem is that investors see few recent examples of successful land reforms elsewhere, says Khan.

Many recall Zimbabwe, where violent takeovers of white-owned farms from 2000 devastated the economy and sent investors fleeing.

“Whenever ‘land’ is mentioned, unfortunately it is the Zimbabwean experience, as flawed a ‘reform’ process as that was, that springs to mind,” said Khan. “It’s very difficult to point to instances, especially in sub-Saharan Africa, with positive examples of land reform.”

Even if legislators produce a draft amendment in 2018, it would take at least five months from that point for it to be signed into law, said Citigroup analyst Gina Schoeman.

“The issue of land reform is likely to cause repeated volatility in rand exchange rates,” said Elisabeth Andreae, an economist at Commerzbank in Frankfurt.

Bloomberg