The threat of expropriation arising from South Africa’s land reform legislation is likely to deter investment.
This is the conclusion from this paper by Langelihle Malimela, senior country risk analyst at IHS Markit, Thea Fourie, senior economist: Africa at IHS Markit and Joyce Silungwe, economist: banking risk at IHS Markit.
The South African parliament began its five-week-long third term on 14 August. During this period, it is expected to redraft the Expropriation Bill in line with the ruling African National Congress (ANC) party’s decision on 31 July to amend the property clause in the Constitution to allow for the expropriation of land without compensation.
Key points
* Policy instability in South Africa relating to property rights is likely to remain elevated over the one-year outlook, although wholesale expropriation without compensation is very unlikely either before or after the 2019 election.
* Uncertainty over property rights is likely to deter fixed investment, limit government revenue, and lower overall GDP growth, and ultimately could trigger further downgrades by international credit rating agencies such as Moody’s during 2019.
* Banking-sector impairment will increase, albeit from a low base, and credit growth is likely to decline.
ANC’s likely course of action
IHS Markit sources report that President Cyril Ramaphosa believes that the ANC’s new policies could undermine investors’ confidence. Since taking office in February, he has used the parliamentary process to delay decisions in respect of the conference resolutions on the SARB, Israel, and the ICC.
However, Ramaphosa is supporting the resolution to change the constitution on the emotive issue of land expropriation. We assess this to be an effort to unite his fractured party while seeking to recapture young and rural voters from the EFF.
We expect that he is very likely to temper such support after taking office with a fresh mandate following the 2019 poll, which the ANC appears very likely to win outright, even though it is unlikely to retain the 62% voting share achieved in 2014.
In the meantime, the CRC’s work is likely to be drawn out as the committee assesses and documents public submissions on the EWC issue, prior to presenting its findings to the legislature for discussion. This is likely to take at least three months.
Parliament must then discuss and establish the wording for a new property clause in the constitution, which is likely to take a further three months or more. Ramaphosa is likely to encourage this process to proceed slowly, extending over the coming months as this stance, and any ensuing court challenges to the amendment, will buy him time.
Given these pressures, Ramaphosa is likely to push for an early election date, potentially in April 2019, with voting almost certainly no later than May. If he then won a clear overall majority, this would give him a strong electoral mandate, better positioning him to influence the drafting of new legislation in a way that emphasised safeguards and reduced the risk of widespread land seizures.
Economic outlook
Uncertainty over property rights – at least until May 2019 – is a particularly negative indicator for South Africa’s residential and commercial property market. Additionally, any positive turnaround in net foreign direct investment flows, which have been net negative since 2014 (see graph), appears highly unlikely.
Instead, South Africa has become excessively dependent on highly volatile portfolio inflows to finance its structurally embedded current-account deficit. These flows are subject to reversal, reflecting changing emerging-market sentiment and the country’s local-currency credit risk ratings.
The weak growth profile is particularly challenging for South Africa’s fiscal finances moving forward. The South African budget assumes a real GDP growth rate of 1,5% for 2018. IHS Markit is of the view that growth will be lower, at around 1,2% to 1,3% for the year. For 2019, the National Treasury projects a real growth rate of 1,8%, but IHS Markit projects real GDP growth of around 1,5%.
The lower growth outlook, combined with less tax buoyancy, will act as a drag on fiscal revenue flows during the upcoming fiscal year. Furthermore, expenditure overruns due to the above-budget negotiated public-sector wage increases, financial constraints at state-owned entities, and the introduction of free education could all add to the deficit.
The uncertainty over property rights, which in IHS Markit’s view will deter fixed investment, limit government revenue, and lower overall GDP growth, ultimately could trigger further downgrades by international credit rating agencies such as Moody’s during 2019 (the only agency that still assigns investment status to South Africa’s local-currency-denominated debt).
Under this outcome, IHS Markit forecasts that the South African rand’s exchange rate could weaken by another 10% to 15%, while GDP growth for 2019 would contract to -2% as both inflation and interest rates spike upwards.
A strict adjustment to the government’s spending ceiling over the medium term could nonetheless prevent a downgrade by Moody’s. Below-budget capital expenditure, the use of the government’s large contingency reserves, some partial privatisation initiatives for state-owned entities such as South African Airways, and downsizing the public-sector labour force could increase the likelihood of this more-favourable outcome.
This scenario also assumes some greater clarity regarding future property rights as the year progresses.
Financial-sector outlook
IHS Markit assesses that credit growth is likely to decline, while banking-sector impairment will increase, especially in relation to land or property used as collateral by commercial farmers, in the unlikely event that the ANC pursues wholesale EWC.
According to the SARB, mortgages in the banking sector amounted to R1,4-trillion (USD98 billion) or 39% of the total loan book at end-2017. We estimate that the banking sector’s exposure to agriculture debt is R160-billion.
EWC would make commercial banks vulnerable to an increase in impairments as bank borrowers who own commercial farms and/or farm houses or land that has been used as collateral effectively could end up with an unsecured loan and loss of the underlying asset, making them likely to default.
In addition, we expect reduced credit growth as banks will be reluctant to extend new credit, especially to the agricultural sector, while policy uncertainty remains.
Other lenders will also be affected by a wholesale EWC. The state-owned development bank, Land Bank, is likely to be the worst affected. Land Bank has a mandate is to provide financial assistance to commercial farmers and agricultural businesses in line with government directions.
During the presentation of its end-2017 results in Johannesburg on 21 August, Land Bank chairman Arthur Moloto indicated that it has R16,2-billion exposure to long-term loans and loans secured by mortgages. Moloto added that, if this loan book portfolio were included in the government’s EWC plan, it would leave the institution with “a call to immediately repay loans amounting to R9-billion”, an obligation that would be challenging for an institution with cash resources of R2,5-billion. Should the bank fail to honour such initial obligations, it would lead to its other creditors demanding repayment of around R41-billion. We expect that the bank would be rescued by the government.
In any case, Land Bank is not in immediate jeopardy: it reported a capital-adequacy ratio of 17,3% for the year ended March 2018 versus 17,7% in March 2017, while its non-performing loans (NPLs) ratio fell to 6,7% from 7,1% over the same period.