Land expropriation without compensation may possibly cause a devastating banking crisis, says Head of Business Development at independent investment banking firm Bravura, Ian Matthews.
Matthews warns against the systemic repercussions that land expropriation policies will have.
“Given the large exposure of banks to the agricultural industry and more than R125 billion debt, there is a high possibility that expropriation without compensation would lead to a banking crisis. The ensuing economic crisis in the agricultural industry and the inability of the banks to recover these loans could result in a systemic risk in the banking sector”, said Matthews.
When asked what this will directly mean for banks and their existence, Matthews said that the banking and finance sectors would struggle to overcome large-scale loan losses. Government would possibly have to step in to prop up the banks and other financial market role players under those circumstances.
Matthews adds that given the devastating drought these past few years, there has been very little investment in the agricultural sector.
He says that it does not seem possible for the agricultural sector to receive further investment.
However, he acknowledged that the expropriation of land will benefit underprivileged individuals and that the upliftment of these individuals is a priority.
In addition, he notes that The Minister of Water and Sanitation Gugile Nkwinti said that the ANC would pursue land expropriation without compensation. The aim of this venture would be to increase agricultural production and ensuring food security is not compromised and that land is redistributed to those who were dispossessed of land during colonial times
At this point, further clarity is needed on the matter, says Matthews.
“A short-term, ambiguous large-scale expropriation initiative could potentially have a dire impact on food security. The loss of jobs in the agricultural sector and the fall in gross domestic product would complicate matters further – the very things that it seeks to redress”, said Matthews.
The rand drops
On the financial loss of the country if the land expropriation bill is signed into the Constitution, Matthews notes that the Rand has already weakened from R11.55 to R11.85 as the news of potential expropriation broke this week.
“Land expropriation without compensation would have a direct effect on farming enterprises and agricultural cooperatives and agribusinesses that provide financial advances to agricultural producers to cover their input costs”.
“Against the backdrop of a 27% employment rate in the country, agriculture remains critical for the country’s labour market, particularly in the rural areas. The number of people working in agriculture had in increased by 29% from 624 000 in 2011 to 881 000 in 2016.
This may appear as a low percentage of the work force in South Africa, but in absolute terms, the number of people that are employed by the sector is considerable high and it continues to rise”.
When asked what the government can alternatively do to empower the less fortunate without harming the economy, Matthews said that the answer lies in improved growth.
“The South African economy grew last year at the low rate of 0,7% as a result of state capture and low business confidence levels. Government now has the opportunity to reinforce confidence and contribute to a recovery in growth and investment. If investor sentiment improves, it leads to a strengthening rand exchange rate and lower government borrowing costs.
Recent events suggest an upturn in the business cycle. Statistics South Africa’s December 2017 economic statistics revealed an unexpected improvement in the economic outlook, largely as a result of growth in agriculture and mining. The SACCI business confidence index reached its highest level since October 2015 – and the Absa purchasing managers’ index its highest level since January 2010.
Stable macroeconomic policies would provide a strong platform to attract much-needed foreign savings that can fund additional investment. government to practice sustained fiscal discipline, this could certainly steer South Africa’s economic fortunes in the right direction. And a healthy economy will provide more jobs with an improved outcome for all South Africans”, concluded Matthews.