Radical land grab would only deepen SA’s financial crisis

AGAINST the backdrop of Durban hosting the World Economic Forum Africa, the phrase “radical economic transformation” was on everybody’s lips. The international economic world was watching South African politicians to see how this phrase would play out in economic policy changes.

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 seize land without compensation.

Small Business Develop- ment Minister Lindiwe Zulu said at the World Economic Forum Africa that South Africa must change its constitution to allow seizure of land for redistribution to black people without compensation because the country’s laws were hindering economic transformation.

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 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 and how the lender would ever be able to recover the loans.

According to the South African Government, the major sources of credit for farmers are banks (56%), agricultural co-operatives and agribusi- nesses (9%) and the Land and Agricultural Development Bank of South Africa (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 worth a total of more than R125 billion.

FirstRand Ltd and Barclays Africa Group Ltd has the largest proportion of agricultural loans, being 3.6% percent 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 co-operatives and agribusinesses provide financial advances to agricultural producers to cover their input costs, which is 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 that could result in a banking and agricultural crisis.

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 would be any further investment if expropriation becomes a reality.

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 restructuring of their balance sheets to protect themselves against the potential financial implica- tions of expropriation of land for no value.

For individual landowners who pro-actively 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. Ian Matthews Head of Business Development at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions.

Expropriation likely to result in widespread bankruptcy