S&P warns SA on land issue

Threat of expropriation without compensation could undermine investment

S&P GLOBAL Ratings on Friday warned that it would lower South Africa’s ratings if the implementation of land expropriation without compensation undermined investment and economic outlook.

Gardner Rusike, a sovereign analyst at S&P, said the agency would keep an eye on how the land reform process unfolded.

“It is still too early to tell how the process will unfold, but we expect that the rule of law, property rights, and enforcement of contracts will remain in place and will not significantly hamper investment in South Africa,” Rusike said.

President Cyril Ramaphosa has on several occasions said land reform will not be implemented in a way that threatens food security or agricultural production. The ANC last week said it would use the Constitution in its current form to test if expropriation was possible without compensation.

Parliament has called for submissions from the general public ahead of its work in investigating the need to amend section 25 of the Constitution to allow for the expropriation of land without compensation.

John Ashbourne, an economist at Capital Economics, said land reform fears were overblown. “Any law that results from the current process should be seen as an incremental expansion of the state’s existing land reform powers. Land reform is… an ongoing process in South Africa,” he said.

S&P on Friday affirmed South Africa’s sub-investment grade credit rating and kept its stable outlook. The rating agency said the stable outlook reflected its view that economic growth will pick up modestly over the next year, while government debt would remain above 50 percent of gross domestic product (GDP).

Proposals Rusike said the recent political transition and policy proposals could support firmer economic growth and stabilising public finances over the medium term. “We now estimate economic growth to average at least 2 percent over 2018-2021, which is still below 1 percent per capita. We estimate South Africa’s GDP per capita at $7 200 (R89 752) in 2018.”

Fitch has rated the country’s local currency debt – which represents 90 percent of South Africa’s borrowings – as sub-investment grade, while Moody’s is the only major rating agency that has this category of debt rated as investment grade.

NWU School of Business economist Raymond Parsons said the single most important challenge remained to turn the economy around and get both the economic growth rate as well as per capita income to much higher levels. “What matters now is the next periodic evaluation of South Africa by Moody’s, which usually tends to be more optimistic. It is, therefore, Moody’s which holds the key to South Africa’s continued avoidance of universal junk status,” Parsons said.

Since S&P’s last review of the country in November, the government has made sweeping changes at state-owned entities and moved to address challenges at the South African Revenue Services. The government has also engaged with investors, including those in the mining sector, as well as the creation of four dedicated investment envoys to attract investment capital to the country.

The Treasury said that the government was determined to achieve improved ratings in the period ahead. “The government will engage S&P on their areas of concern. Taking steps to improve business confidence even further, achieving higher economic growth, fast-tracking the SOC reform agenda, and ultimately restoring the country’s investment grade credit rating, remains a top priority,” it said.