George Saravelos, global co-head of FX research at Deutsche Bank, has indicated that the rand could fall further following confirmation that the country’s economy is in recession.

Speaking to Bloomberg TV, Saravelos drew comparisons between South African president Cyril Ramaphosa and his predecessor Jacob Zuma – who suffered the same false start nine years ago with a recession in his first six months in office.

However, he argued that the rand’s drop is in line with other emerging markets, and was not necessarily due to Ramaphosa’s failure to introduce reforms.

“I think the biggest issue that South Africa is facing is that it is being swept away with all the weakness in other emerging markets, specifically Turkey and Argentina,” he said.

“South Africa is one of the biggest markets for EM fund allocations.

“Now what you’ve had over the last two months is a series of significant negative data surprises and that’s really sweeping up South Africa in this EM-storm. The market has not been as underweight South Africa as it has been some other markets, and what we are seeing now is an adjustment in that position.

“We are actually quite negative on the rand because of these exposures.

“We are nearly up to R15.50/dollar which is the high for the year, but I think we could see a move through to R16/dollar – and all that would be is essentially a catch-up of what other risky EM markets have done.”

Worsening problem

The emerging-market sell-off may have already battered South Africa’s rand, but it could get worse as traders worry over a push for land reform that would have far-reaching economic consequences and is catching the attention of world leaders, according to a separate Bloomberg article.

The currency plunged almost 10% against the dollar in August, its worst month in more than five years.

It’s down another 3.4% this week after the economy fell into recession.

Derivatives markets are signalling even more pain to come as contagion from crises in Argentina and Turkey spreads and with traders on edge about the ruling African National Congress’s plans for a constitutional amendment to permit expropriation of land without compensation.

Most investors agree land redistribution is crucial to address lingering inequalities between white South Africans – who own 72% of commercial agricultural land, according to a state audit – and black citizens, almost 25 years after the apartheid system of government ended.

But they’re concerned about a lack of details and say it could undermine property rights, deter foreign investment and lead to penalties from other countries, according to Morgan Stanley and Standard Chartered.

“Land reform is emerging as one of the key issues and it’s clear markets remain nervous,” said Razia Khan, London-based head of African research at Standard Chartered.

Reflecting investors’ angst, the currency suddenly rallied on 28 Augustt after lawmakers announced they were withdrawing a bill on land expropriation. The surge ended barely 10 minutes later once traders realized it was a procedural move and that the constitutional change was being dealt with separately.

“This type of reaction might well become commonplace ahead of the 2019 general elections,” said Nema Ramkhelawan-Bhana, the head of research at Rand Merchant Bank in Johannesburg.

Currency traders are bearish. The premium of options contracts to sell the rand over those to buy it in the next three months, known as the 25 Delta risk reversal, has soared to 5.59 percentage points, the highest in three years and the highest level worldwide after Turkey’s lira.

The rand dropped 2.3% to R15.2087 per dollar by 11:19 a.m. in Johannesburg – its weakest on a closing basis since June 2016 – after data showed the economy contracted for a second straight quarter between April and June.

In an extreme scenario, with wide-scale expropriation of land without compensation leading to credit-rating downgrades and debt defaults, the rand could weaken to R24 against the greenback by the end of next year, Investec chief economist Annabel Bishop said in a report on 3 September.

A best-case scenario, with land reform benefiting the poor without undermining the economy, could cause the currency to strengthen almost 50% to R7.90 per dollar, she said.

US president Donald Trump raised the prospect of South Africa being penalized when he tweeted on 23 August he’d told Secretary of State Mike Pompeo ‘to closely study the South Africa land and farm seizures.’

UK prime minister Theresa May said in Cape Town last week that while she supported land reform, officials should “bear in mind the economic and social consequences.”

Under Trump, the US has ramped up sanctions against emerging markets, including Russia and Turkey, with the lira buffeted after Washington raised metals tariffs early last month.

“It may have been a passing thought which Mr Trump has already forgotten, or it might be the beginning of a theme for him,” said John Ashbourne of London-based Capital Economics.

“But Turkey’s experience highlights that even very limited sanctions would have a big market effect.”

Read: South Africa enters recession after GDP declines for a second quarter