The phrase “radical economic transformation” is on everybody’s lips and the international economic world is watching South African politicians to see how this phrase will play out in changes to the economic policies.
A subtext in the current uncertainty is that the reality of land expropriation looms large for South Africa’s agricultural landowners. The current debate is focused on whether this will be with or without compensation. From various corners, there is a call for the State to be allowed to seize land from property owners without compensation. Small Business Development Minister, Lindiwe Zulu, said at the World Economic Forum Africa, that SA must change the Constitution to allow seizure of land for redistribution to black people without compensation because the country’s laws are hindering the transformation of the economy.
Expropriation is a drastic step which deprives the owner of a property of its ownership rights. The bad news is that expropriation could trigger far greater economic upheaval. Expropriation without compensation could create a systemic risk for the South African banking/financing industry as a whole.
Loan and bond agreements entered into with a bank do not typically take into account a scenario in which property seizure results in a forcible change of ownership. If a loan is defaulted upon as a result of expropriation, it is unclear what the recourse would be for the borrower involved, and how the lender will ever be able to recover the loans granted.
According to the South African government, the major sources of credit for farmers are banks (56%), agricultural cooperatives and agribusinesses (9%), the Land and Agricultural Development Bank of South Africa (the Land Bank) (30%).
South African banks have a significant exposure to the agricultural industry. According to Bloomberg, farmers have their highest-ever debt with South African banks with a total of more than R125 billion. FirstRand Ltd and Barclays Africa Group Ltd has the largest proportion of agricultural loans, being 3.6% and 3.4%of their total lending book respectively. Standard Bank’s portion is 2%, whereas for Nedbank it is 1%.
According to the 2016 Land Bank Annual Financial Report, it holds a staggering gross loan amount of R39 billion. Also, agricultural cooperatives and agribusinesses provide financial advances to agricultural producers to cover their input costs, which is then repaid once the crop is harvested. It is therefore clear that expropriation which leads to a failure to recover these loans would result in widespread bankruptcy and an ensuing economic crisis which could result in a banking and agri crises.
The impact of a large-scale expropriation initiative on food security, the preservation of jobs in the agricultural sector and the fall in gross domestic product would complicate matters further. After the debilitating drought of the last few years there has been very little investment in the agricultural sector over the last few years. It would be difficult to see how there will be any further investment in the agricultural sector going forward if expropriation becomes a reality. One suspect that even now there is hesitancy to invest in or finance any new agricultural venture as a result of the uncertainty created by such comments.
Without further clarity on the criteria of expropriation at this point, any farmer with a grain of sense should begin considering strategies to protect their investments in the medium term. This includes investigating a restructure of their balance sheets to protect themselves against the potential financial implications of expropriation of land for no value.
For individual landowners who proactively develop scenarios to meet expropriation in its different forms, there are solutions or risk management strategies available.
South Africa’s economy can, however, ill afford a further blow as a result of banking instability brought on by mass insolvency in the agricultural industry. It is hard to imagine who would benefit from the process.