Land expropriation plans fuelling political and banking risks in SA

Risk managers are watching carefully after the South African government said it would push ahead with plans to amend the constitution to allow land expropriation without compensation. At the end of July, President Cyril Ramaphosa said the ruling ANC will “finalise a proposed amendment” allowing the move, saying reform was “of critical importance” to the economy. There has been growing anger about the slow pace of land reform in South Africa, with many saying the country’s white minority has a disproportionate hold over land. About 10% of land in white ownership has been transferred to black owners since the end of apartheid, which is only a third of the ANC’s target. Since the announcement, the country has been rife with rumours. One forum published a list of farmers it said would stand to lose their land. The Department of Rural Development and Land Reform denied the existence of a list of farms but, instead, said it has details of farms and their owners it has been negotiating with in the past. In the past month, South Africa’s rand has been dropping steadily, with the currency falling more than 4% compared to the US dollar in one weekend alone. It is some 15% down overall compared to its mid-July levels. However, observers fear that, in the end, the true damage will be felt in the fledging confidence that foreign investors had been showing since President Ramaphosa took over at the helm. The move also comes as trade wars look set to intensify, particularly between the US and China as President Donald Trump introduces increasingly protectionist measures. Again, trade experts are reporting a ripple effect that is impacting emerging markets. Back in South Africa, ANC chairperson Gwede Mantashe has been one of the first to spell out what the land expropriation could look like. Speaking to News24, Mr Mantashe stated: “You should not own more than 12,000 hectares of land and therefore if you own more, it should be taken without compensation,” he said. Under his proposal, all white farmers who owned more than the stipulated 12,000 hectares would give over ownership of the rest of their land to the state, which would then redistribute it, prioritising successful black farmers currently working on communal land. One of the often-repeated defences against expropriation is the impact it could have on the banking system, which holds mortgages on many farms. When asked about farm owners who still owed the bank, Mr Mantashe said most of the debt is for improvement of the land and not for the actual land. “If it is debt for improvements, that should be considered, but if it is the debt for buying land, that is a different matter. Most of the debt with the bank has nothing to do with land, it has everything to do with the improvements,” he said. However, there have been warnings that this could spell disaster for the banks. Anthea Jeffery, head of policy research at the Institute of Race Relations, told Fin24 that if banks know there is a risk in title to land, it would have to be factored into the price of the loan facility. “They will have to take a robust approach,” she said. She added that the Expropriation Bill of 2015, which has not yet been approved by parliament, stipulates that on expropriation, the bond on the property ends. In the current Expropriation Act of 1975, the compensation has to be used to first service the loan. “But with the new motion, undoubtedly there will not be any money,” she said. “How will the bank get the money it is still owed? It cannot foreclose on the property, because the state now owns the property. “If this default happened on a massive scale, it could be disastrous for banks,” she said. Theo Boshoff, legal intelligence manager at Agbiz, said commercial banks as well as the Land Bank are heavily invested in the agricultural sector, of which roughly a third is collateralised through land. The debt-to-asset ratio in the agricultural sector is extremely high and many loans are secured by registering mortgage bonds over the property, Mr Boshoff told Fin24. Economists from the major banks estimate that South African farmers are indebted to the tune of about ZAR160bn. The majority of this debt (70%) is held by commercial banks, with the rest shared between the Land Bank (25%) and development finance institutions and agribusinesses.

Land expropriation plans fuelling political and banking risks in SA

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