South Africa’s recent slide into recession comes at a tumultuous period for emerging markets (EM) and the business-unfriendly land reform initiative will only add to the overall souring of EM sentiment, potentially triggering a further sell-off in the country’s assets.
A large part of the population perceives the country’s current distribution of land as among the root causes for the country’s slow economic development and socio-political challenges. While there is academic evidence against such views, the upcoming general elections will probably force the ANC to meet popular demands.
Historical land injustices are increasingly blamed for South Africa’s current economic and socio-political challenges. While apartheid-era ‘white rule’ officially ended in 1994, the bulk of farm and agricultural land remains in ownership by the country’s small while minority. Moreover, government promises of a gradual redistribution of some historically dispossessed agricultural land have largely not been met.
In the context of economic growth markedly undershooting EM peers’, high and still growing unemployment, and wealth inequalities that are among the worst in the world, large parts of South Africa’s population are increasingly perceiving a more radical reallocation of land without fair compensation as a route to overcome some of the country’s structural challenges.
Source: Statistics South Africa, Bloomberg, 2018 IMF Forecast, Fidelity International, September 2018
Interestingly, there is strong academic evidence that the current allocation of land is not the main impediment for the country’s economic underperformance. Both domestic and international economic surveys highlight that South Africa’s underwhelming economic development is driven by other issues, including inefficient government bureaucracy, restrictive labour markets, poor educational outcomes, policy uncertainty, and corruption.
These factors are also among the key drivers for South Africa’s deteriorating rank on the World Bank’s Ease of Doing Business index, where the country has slipped dozens of places relative to African peers in recent years.
Country rank. Source: World Bank, Fidelity International, September 2018
While the bulk of South Africa’s top political leadership understands that radical land reform may be a red herring, upcoming general elections will probably force the government to still engage with the issue to some extent.
South Africa’s president himself appears to understand that radical land expropriation may further damage the country’s already poor and deteriorating business environment. However, some populist politicians both within and outside the ANC party administration are vocally demanding for radical land reform to remain on the government’s core agenda.
And given that the topic is becoming increasingly popular with the electorate and general elections are due in 2019, the government may well be forced to advance some legislative proposals on the matter. However, more radical forms of expropriation without compensation will probably remain off the agenda.
Nonetheless, the land reform story could hardly come at a more unfavourable time, given the broad-based weakness in emerging markets at present. South Africa does not just face anaemic growth, but also significant fiscal and current account deficits. A further withdrawal of support by either portfolio or real-sector investors would compound the country’s economic challenges.
Net foreign direct investment flows are already negative and both the South African rand and government bond prices have fallen in response to land reform headlines in recent weeks. Further volatility seems likely as the legislative initiative progresses, especially in the context of a more generic weakening of investor appetite for EM risk assets as US interest rates rise and trade tensions grow.
Financial markets are becoming increasingly selective on where to allocate funds, and South Africa’s business-unfriendly land reform initiative could certainly remove the country’s assets from some investors’ radars.