Publications
Partners
The surge in business and investor confidence generated by President Cyril Ramaphosa’s leadership is being undermined by the ANC’s decision to support land expropriation without compensation – sweeping aside his pledge to restore policy certainty and dampening South Africa’s improved growth prospects.
Parliament’s resolve to investigate changing the Constitution in order to implement the controversial policy is being widely interpreted as a political move to erode support for the EFF ahead of next year’s general election, and has fanned concern that policies will at least in part be formulated to support the interests of the ANC rather than those of the economy.
Although South African business acknowledges that the sluggish pace of land reform needs to be urgently addressed, there is deep concern over the route that the ANC has taken, given the lack of information over how exactly it will be implemented and what sort of property will be affected; concern which is likely to persist for months.
There are already many indications that the direct threat to property rights – crucial to economic stability – has forced investors to put plans on hold, particularly in agriculture, the sector which appears to be first in the firing line despite having been one of the main drivers of the pickup in economic growth seen last year.
The topic has begun to rear its head in international media – often sensationally – and as the coverage inevitably spreads, perceptions of SA as a more inviting place to do business will dissipate, spooking foreign as well as domestic investors.
On 4 March Lindiwe Sisulu, minister of international relations and cooperation, was forced to issue a statement urging the international community not to panic over parliamentary processes related to land redistribution in the country.
But that is unlikely to soothe the investment community.
“When you start talking about property rights being under threat it chips away at the goodwill SA has globally – it is damaging and is the last thing which the country needs,” says Martyn Davies, managing director of emerging markets and Africa at Deloitte.
Davies says he has already been contacted by worried foreign investors, including one sovereign wealth fund. South Africans could understand the political context of the debate, but the jitters it had generated overseas were destabilising for a modern, globalised economy like SA’s, he warned.
Impact on banks
Cas Coovadia, managing director of the Banking Association South Africa (Basa), has been one of the most outspoken domestic critics of the plan, warning about the potential damage to SA’s economy.
Banks are exposed to R180bn in agricultural lending, and question marks over how the debt will be handled could cause “serious” systemic issues for the financial sector, he has warned.
“The country has a number of critical issues. Irrespective of how important they are, they cannot be looked at in isolation, without examining the consequences. There is a lot of rhetoric and ideological debate which needs to die down – the quicker we get clarity and sit down and bring rationality to this the better,” he says.
“If one looks at the expropriation of property it could mean urban land, it could mean vehicles, it could mean anything. At this point in time, the general principle of expropriation without compensation is not the route we should be going.”
Coovadia says Basa has been engaging with the ANC and the government on land reform for “quite some time” and would pick up the engagement going forward.
He said on 5 March that some time ago banks had proposed a 51%/49% arrangement between farm workers and farm owners on land adjacent to existing farms, and was ready to commit R15bn to such a programme over the next few years, although it would also have to be subsidised by the government.
Agricultural experts point out that any new farmers receiving large transfers of land will require significant support for several years, through both training and equipment.
Credit ratings
The problem is that the government does not have the money to put into new land reform programmes, and is already scrambling to fund free higher education while holding on to its investment-grade credit rating from Moody’s, which is scheduled to announce its latest assessment on 23 March.
The conviction that Moody’s will keep SA’s rating above “junk” status after putting it on watch for a downgrade in November has been shaken by the issue of land expropriation without compensation.
The agency flagged it as a concern when it issued a comment in December noting that the new ANC leadership held out the prospect of a credit-positive policy shift.
Most analysts believe that Moody’s will hold fire, because it kept SA’s sovereign credit rating at investment grade during the political turmoil the country experienced over the past two years.
It has traditionally been the most upbeat on SA, and is the only ratings agency which has not downgraded the country’s foreign debt to “junk” after damaging Cabinet reshuffles and an alarming deterioration in government finances – which was alleviated in the Budget which Treasury presented in February.
Another support for SA’s credit rating is news this month that the country’s economy grew by 1.3% in 2017 – well above independent forecasts and the Treasury’s Budget estimate of 1.0%.
This also means that the crucial debt to GDP ratio is bound to be lower than then expected.
But now, there is an element of doubt. Finance minister Nhlanhla Nene said on 5 March that he had spoken to Moody’s and was confident that the Treasury had presented a “credible story” in its Budget last month – but he didn’t want to be overly optimistic.
Nene has also said that the Treasury’s Budget-growth forecasts are likely to be exceeded given the uptick in business confidence.
Its latest estimates predict that growth will quicken to 1.5% this year, 1.8% next year, and 2.1% in 2020, but the forecast growth is still below the pace of most other emerging markets and too low to make significant inroads into unemployment, SA’s biggest challenge.
Importantly, the forecasts hinge on expectations that this is the year fixed capital investment in the economy would get back on track.
The Budget predicted it would grow by 1.9% this year after a meagre 0.3% increase in 2017, climbing to 3.3% in 2019 and 3.7% in 2020.
Dampening investment
But in the agricultural sector at least, this is not going to happen until there is clarity on exactly how the controversial land expropriation policy could potentially work.
“A number of farmers have called and said they are not putting any additional investment into their land – this means new crops, new orchards, new tractors, harvesters or livestock,” says John Purchase, CEO of Agbiz. “One person who was about to buy a new farm said he was going to pull out. Everyone is in a wait-and-see situation.”
When the ANC first announced it wanted to implement land expropriation without compensation at its December policy conference, the party stated that this policy would be carried out in a responsible manner that wouldn’t undermine the economy, job creation, or food security.
Purchase maintains that, for many reasons, achieving those aims is not realistic. If food production suffers, prices will rise and if SA becomes a net food importer rather than an exporter as it is at present, the impact would be even greater.
There are only about 35 000 commercial farms in the country and about a fifth of them account for most of production.
“It’s too early to panic, but it’s a matter of concern. There is probably some overreaction, but really we don’t know if there’s going to be a worst-case scenario.”
Ironically, SA is embarking on this path at the time when Zimbabwe’s new government has pledged to compensate white farmers who lost land during farm invasions instigated by former president Robert Mugabe’s government in the 2000s.
The ensuing chaos tipped Zimbabwe into a crippling recession and made the country an international pariah. Few believe SA will head down that route, but if the process of land expropriation without compensation isn’t handled well, the economic and social consequences will be severe.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.
This article originally appeared in the 15 March edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.
