Worst month for the rand in five years
AUGUST: WORST MONTH IN OVER FIVE YEARS
It may worsen as traders fret about economic consequences of push for land expropriation.
This type of reaction might well become commonplace ahead of the 2019 general elections – RMB.
The emerging market sell-off may have already battered the rand, but it could get worse as traders fret about a push for land reform that would have far-reaching economic consequences and is catching the attention of world leaders.
The currency plunged almost 10% against the US dollar last month, its worst month in more than five years. It’s down another 3.4% this week after the economy fell into recession.
Derivatives markets are signalling even more pain to come as contagion from crises in Argentina and Turkey spreads and with traders on edge about the ANC’s plans for a constitutional amendment to permit expropriation of land without compensation.
Most investors agree land redistribution is crucial to address lingering inequalities. But they are concerned about a lack of details and say it could undermine property rights, deter foreign investment, and lead to penalties from other nations, 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 at Standard Chartered.
Reflecting investors’ angst, the currency suddenly rallied on August 28 after lawmakers announced 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 at Rand Merchant Bank.
Morgan Stanley said land reform was “brought up at just about every meeting” it had with US investors earlier this year, with the “overwhelming majority” believing the proposal could hurt SA markets.
In an extreme scenario, with wide-scale expropriation of land without compensation leading to credit-rating downgrades and debt defaults, the rand could weaken to 24% against the US dollar by the end of 2019, Investec Bank’s Annabel Bishop said. A best-case scenario, with land reform benefiting the poor without undermining the economy, could cause the currency to strengthen almost 50% to R7.90 per dollar.
US President Donald Trump raised the prospect of South Africa being penalised when he tweeted on August 23 he had told Secretary of State Mike Pompeo “to closely study the South Africa land and farm seizures.” UK Prime Minister Theresa May said last week that while she supported land reform, officials should “bear in mind the economic and social consequences.”
Easing concerns
President Cyril Ramaphosa partially eased investor concerns when he wrote in the Financial Times that any constitutional change wouldn’t hurt the economy or the agricultural sector. Expropriation 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.”
Part of the problem is that investors see few recent examples of successful land reforms elsewhere, according to Khan.
The issue is set to shadow the rand for several months at least. – Bloomberg