Investigation: South Africa’s bill to seize certain foreign owned interests; What’s the effect on financial industry?

FinanceFeeds has discovered that The African National Congress (ANC) which is the incumbent government in South Africa is very likely to carry out a seizure of certain foreign owned interests.

Should this take place, it could mean a rocky road ahead for FX brokerages, liquidity providers and vendors from other regions which have operations and customers in South Africa, one of the most important emerging market economies globally.

Whilst South Africa aligns itself with fellow BRICS economies and is striving to improve its national interest via stronger relations with Brazil, India, China and Russia, as well as generating positive international relations with Australia, the vast majority of companies in the FX business are not based in those nations and therefore, with the exception of a few retail FX companies in Russia and Australia, the door could be closed by the South African government for the lion’s share of retail participants.

One of the most discouraging factors for companies entering emerging markets was historically what is known as ‘expropriation risk’, which is the possibility that a government in a specific country would seize or limit foreign-owned assets or interests. This risk has been widely acknowledged to have subsided completely, however with the news that the ANC is looking to carry this out in South Africa, it is clear that it is rearing its head once again.

The warning signs that the current government, led by President Jacob Zuma, would increase its disdain toward foreign investment in South Africa became more evident in February this year, when President Zuma announced that foreign persons or entities would not be allowed to own land in South Africa, instead being restricted to eligibility for long term leases.

Despite this looming restriction on certain overseas businesses, South Africa is open to its own entities investing abroad. As of 2010, South African companies have been permitted to invest up to R500 million abroad subject to the submission of an application to an Authorised Dealer in the form of the Exchange Control Department of the company’s commercial bank.

This was established with the explicit purpose of encouraging the expansion of South African operations in foreign countries.

Potential expropriation of large multinationals – are overseas banks and financial entities next?

FinanceFeeds conducted a corporate lawyer in South Africa who explained that there is a proposed security bill on the horizon which, if signed into South African law by President Zuma, will place the decision into the hands of US government lawyers as to whether it amounted to expropriation. Unofficially, officials within President Obama’s administration hold the view that it very likely does.

Currently, the only sector which stands to be affected by this is the security industry, mainly multinational companies including ADT, Chubb, Securitas and G4S, Panasonic, Sony, Fedex, Bosch, Honeywell, Motorola and Siemens, however, a legal precedent such as this could pave the way for it to be applied to other sectors.

The law states

“the Treasury shall instruct the US executive director to vote against any use of IMF funds for the benefit of any country that has, after 1956, nationalized or expropriated US property without compensation or adequate arbitration unless the funds are directed to programmes that serve the basic human needs of citizens of that country”.

This would also be extended to World Bank loans, bilateral lending and loan guarantees.

The gravity of this law being inaugurated in the security sector is indeed not a matter to be taken lightly at all, as this is a very large industry in South Africa, especially among private security firms as it employs over 2 million people, consists of 12,000 firms and is worth 50 billion rand per year.

The mere thought that this could be extended into the financial sector is potentially troubling.

According to Business Daily,

“section 20 of the bill, which is awaiting Mr Zuma’s signature, would require multinational private security companies to reduce their shareholding in local subsidiaries to 49% or less, resulting, the industry fears, in a fire sale of assets at less than fair market value.”

One particular lawyer had stated that a foreign diplomat had commented to him that

“South Africa is doing its best to destroy its relationships with its major trading partners”.