What’s going on in South Africa?

Summary:

• ZAR has been underperforming as of late

• South African government wants to expropriate white farmers of their land

• Rand found itself under renewed pressure after Donald Trump stepped into discussion via Twitter

While the Turkish lira was the emerging market currency that has drawn the most attention as of late, thanks to the currency crisis resulting from the President Erdogan’s doings, the South African Rand also found itself under pressure. It can be partially ascribed to the situation in Turkey as it ricocheted on most of the EM currency. Nevertheless, there are strong domestic reasons for the latest poor performance of ZAR.

ZAR TWI looks undervalued as it remains around one standard deviation below the “fair value”. Source: Macrobond, XTB Research

While the reason behind the ZAR depreciation certainly is not new the topic became more vivid as the South African government began to act. Namely, the President Cyril Ramaphosa along with his party African National Congress decided to expropriate some of the farmers from their land without providing any form of compensation. While this is a clear breach of the right to possess private property guaranteed by the country’s constitution details of the plan are even more thrilling. Namely, the SA government want to expropriate only farmers of white skin color. Authorities are calling it a part of land reform that they aim to legitimize by implementing necessary amendments to the constitution. Moreover, they reason their doings by saying that its an attempt to regain the land obtained illegally during the apartheid times.

Trump informed via Twitter that the US authorities will examine the South African expropriations. Source: Twitter

As one can see the South African authorities are trying to revert the injustices of the times when racism was common in Africa in a similar approach but with different skin color as a target. Not surprisingly, such a situation attracted international attention. While the situation calmed over the recent days it was reignited yesterday when the US President Donald Trump sent a Tweet concerning the matter. Trump informed in a message that he asked the US Secretary of State to examine the issue and by doing so spurred concerns that sanctions may be levied upon the African country.

David Mabuza, the Deputy President of the South Africa, responded to this message by saying that the land reform will be conducted without breaching the constitution. He continued saying that such reform must not result in “social fractures and racial polarisation” and that no farmer needs to fear as no farms will be invaded and grabbed from the farmers. He concluded by saying that “the land reform process poses no direct threat to the agriculture sector and economy as a whole”. Nevertheless, it seems to be in contrary with facts as the process of expropriation is said to have already begun. Two farms in the northern part of the country owned by white farmers have been targeted by the country’s authorities recently, according to the City Press newspaper. Having said that, ZAR traders should stay on guard as the currency is likely to be more sensitive to the upcoming news flow in the nearby future, especially as the US and Trump stepped in.

If the situation is to continue developing in the manner we are observing right now it may pose a serious threat to the country’s banking system. The land that is said to be the target of expropriation process was often bought via mortgage loans and serves as a collateral for the loans. Having said that, a seizure of land may spur a massive wave of defaults on this loans and therefore threaten the stability of the South African financial system.

USDZAR has been trading within an uptrend since the beginning of the year. However, the pace of advance accelerated significantly in the past dozen or so days. Despite easing throughout the this and previous week ZAR once again found itself under pressure today following a Twitter post from Donald Trump. Source: xStation5