The South African Rand Sell-Off Extends as Foreign Investor Inflows Respond to Ramaphosa's "Agressive" Shift on Land Confiscations

Image © Government of South Africa

- Rand on the back foot as markets digest populist political developments

- Land title deeds are a bedrock of financial system

- Move has "negative impact on investor confidence"

The South African Rand is the laggard on global FX markets as South Africa's ruling ANC party has confirmed they will push through a change in the country's constitution to allow for the expropriation of land without compensation.

The move is seen as being a political manoeuvre by the ANC to outflank the insurgent EFF party that holds a radical socialist agenda.

Currencies very rarely respond well to populism, and the South African Rand is expressing investor discomfort:

The Pound-to-Rand exchange rate is trading at 17.45 having been as low as 17.16 this week, the Dollar-to-Rand exchange rate is at 13.30 having been as low as 13.11.

"The uncertainty around this issue is certainly negative, and will keep the Rand and SA bond yields on the backfoot," says Zaakirah Ismail with Standard Bank in Johannesburg.

Is it any wonder markets are not enthused by the government's decision to turn the country's title deeds into toilet paper? Property is one of the fundamental assets underpinning the economy, both socially and financially as title deeds are used to leverage considerable amounts of finance.

Markets will therefore now have to reappraise the entire investment environment in South Africa on the basis of this decision and are clearly taking the view that the outlook has deteriorated somewhat.

One only needs to look north of the border to Zimbabwe to fathom the implications the move presents.

"The new legislation is expected to have a negative impact on investors’ confidence and dampen foreign flows into SA," says Elsa Lignos, foreign exchange strategist with RBC Capital Markets.

President Cyril Ramaphosa announced on Tuesday that the ANC would support an amendment to a section of South Africa's Constitution to "explicitly" expropriate land without compensation (EWC).

"It has become patently clear that our people want the Constitution to be more explicit about expropriation of land without compensation, as demonstrated in the public hearings," Ramaphosa said following a two-day strategy meeting of the ANC's leadership.   

Agressive Stance

The move by the ANC and Ramaphosa was a surprise to markets as it pre-empts the current parliamentary review process to examine the question of changing the constitution to allow EWC.

Previously the ANC appeared to hold a view that EWC could be pursued within the bounds of the existing Section 25 constitutional provisions, and that all that was needed was some jurisprudence to determine under what conditions “just and equitable” compensation could be zero.

"The more aggressive approach on the issue reflects elevated political pressure on the ANC ahead of general elections due sometime in Q2 next year, and comes against the backdrop of factional divides within the party, and strong public anger from the majority black electorate over the failure to deliver adequate land reform since 1994, as manifested in the public hearings on the issue," says Peter Worthington, an analyst with ABSA in Johanessburg.

"Regardless of President Ramaphosa’s assurances that EWC itself will be pursued in a way that leads to more equitable land distribution and strengthens, rather than undermines, the economy, we think this promise could be difficult to deliver quickly," adds Worthington.

Another announcement made by Ramaphosa alongside the land confiscation decision involves the release of a new economic stimulus package.

The government plans to ignite growth by introducing trade support for sectors such as sugar and others affected by import surges, increased investment in public infrastructure, and further support for entrepreneurs and small and medium business.

Markets clearly see this as a sideshow to the more important and radical moves made on property rights.

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