The market underestimates the amount of "noise
and tension" likely to follow the Joint Constitutional Review Committee's
recommendation that the Constitution be explicitly changed to allow for expropriation
This is according to Peter Attard Montalto, head of capital markets research at Intellidex.
He believes it is impossible that any such Constitutional change could be completed before the national elections next year.
"Now begins a complex interplay of politics, policy and practicalities between Parliament, government and the executive, the political parties, interested parties and the courts.
"We expect a significant amount of noise from the EFF and ANC's National Executive Committee (NEC) – more so if the courts do interdict the process," says Montalto.
Market 'took it well'
"The market in the end took the announcement of the Parliamentary CRC very well. This was thanks to some more general risk for emerging markets, and lower oil prices."
According to Montalto, markets ultimately understood that this is a long and complex process and that what occurred at the CRC was only an inevitable small stepping stone.
Montalto advises investors to consider that "the most negative parts" of expropriation without compensation may end up being linked to the expropriation bill and not amendments to Section 25 of the Constitution.
"A 'law of general application' is required to enact a Section 25 change for expropriation without compensation.
"Yet the government is attempting to progress this before the elections. A new expropriations bill will be placed for public comment in December and laid before the National Assembly, we believe late in the first quarter of 2019.
"However, this cannot meaningfully progress without a change to Section 25, which it would have to reference," said Montalto.
"Proceeding with an expropriation bill that puts expropriation without compensation into law before a Section 25 amendment would show that changing the Constitution was irrelevant. We and many others have argued that the existing Constitution already allows for it and so it doesn't make political sense. It would also open the process to legal challenge."
Progress before elections
Intellidex believes the ANC and EFF will not be risk averse on procedural or legal matters and will try to push on as much as possible to show as much progress as possible before the elections.
"We expect a toxic mix of political speed pressure as well as legal action to raise tensions in the first quarter of 2019. These will include racial tensions," says Montalto.
"We think that, while the market is right to expect no passing of the Constitutional amendment - the 'big' vote - before the elections, it is underestimating the noise and political pressure for speed in the first quarter of 2019."
Overall, Intellidex sees the expropriation issue as a rand volatility risk more than a "set piece" rand trend-weakening driver.
"Overall the process from here is going to be incredibly complex and provide no clarity for the market and investors until well after the election," concludes Montalto.
"The 'Ramaphosa debate' on land reform is happy to go through this very high-risk process which risks dampening growth – because it believes it is unlikely to ever pass final muster in the courts – in our view."
In other reaction to the CRC decision, Business Unity South Africa President Sipho Pityana has called for "cool heads and pragmatism" in any changes that may follow the CRC's decision, while Agri SA has slammed it, saying it will cause "large scale damage to the SA economy". The Banking Association of SA has urged government to protect property rights.
* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER