Land: ‘Financial suicide’

Researchers warn that expropriation without compensation may cost 2.28-million jobs and cut GDP by R454.8-billion

Economists who have modelled the future of the economy should the country opt for the expropriation of land without compensation have predicted the result will be extreme economic decline, junk status and at least 2.28-million jobs lost.

Researchers Roelof Botha, of the Gordon Institute of Business Science (GIBS), and Ilse Botha, of the University of Johannesburg’s department of accountancy, in a report on the macroeconomic effect of a policy of land expropriation without compensation, conclude that it will result in a predictable decline in capital formation, leading to a prolonged recession, increased unemployment and declining tax revenue.

The researchers base their forecasts on evidence from seven countries — Portugal, Spain, Romania, Vietnam, Venezuela, Ethiopia and Zimbabwe — that pursued similar policies that threatened private property ownership.

“Empirical evidence confirms the stifling effect on initiative, entrepreneurship and productivity inherent in the plethora of regulations and restrictions that accompany an institutionalised system where private property ownership is not guaranteed and protected by law,” the authors say.

In the countries studied, there was a decline in capital formation to gross domestic product (GDP) after the implementation of policies that threatened private property rights, resulting in “debilitating effects on their economies”. They warn that “imminent socioeconomic disaster” awaits South Africa should expropriation without compensation be implemented.

The researchers say that, where there was a recovery, this was as a result of reversing the policy. They say they had set out to do an “objective” assessment on the economic effect of a policy that allows for expropriation without compensation. The study was peer-reviewed by Lumkile Mondi, a senior lecturer at the University of the Witwatersrand’s school of economic and business sciences, Keith Lockwood from GIBS and agricultural economist Wandile Sihlobo.

Capital formation is a country’s net capital accumulation over a given period and is directly linked to economic productivity and development. The researchers say that there’s “irrefutable” evidence of a causal relationship between capital formation and economic growth.

The capital formation to GDP ratios of the seven countries declined on average by 13.9% annually. The researchers say this justifies their “conservative” estimates of either a 5% or 10% annual decline in capital formation in South Africa.

They say just the prospect of expropriation without compensation being adopted has resulted in a 7% capital formation decline in real terms over the past 11 quarters.

They based their forecasts on 10 quarters, starting from the second quarter of 2018 up to the end of the third quarter of 2020. According to one projection, a 5% decline in capital formation would lead to a contraction in annualised nominal GDP of R270.4-billion by the third quarter of 2020. In the worst-case scenario of a 10% decline, annualised GDP will shrink by R454.8-billion. In both cases, South Africa would enter a recession this year, which would hold for the duration of the 10-quarter forecasting period.

In the same period, government revenues would decrease by R157.5billion in the first case and by R261.5billion in the second, and the budget deficit to GDP would grow from a 2018-2019 estimate of 3.8% to 5.3% in the first case and to a mind-numbing 6.5% in the second case by the third quarter of 2020. In the second case, when compared with a policyneutral scenario, the decline in GDP would see as many as 2.28-million people losing their jobs.

The economic havoc would not end there. Moody’s, the only rating service to hold South Africa’s sovereign bonds at investment grade, would probably downgrade them to junk following a recession and fiscal instability, the researchers say.

“This will inevitably lead to higher money market and capital market interest rates and increase the cost of servicing public debt, leading to a so-called crowding-out effect of the financial ability to spend funds on poverty alleviation and basic services such as education, health and the maintenance of infrastructure.”

The researchers are confident about the results of their study, stating that “politicians and bureaucrats cannot repeal the fundamental laws of economics that have been proven in this study, try as they might”.

They acknowledge that anger over the present patterns of land ownership is understandable, but they call for a more “sensible” approach to redress that will not disturb economic stability. Land reform could, for example, be approached in the same way as political reform was at the Convention for a Democratic South Africa.

“It makes no sense … to attempt the implementation of land reform policies that have proven over and over again to exercise a destructive influence on the economy and threaten the livelihoods of the most vulnerable members of society — those that cannot sell their skills in other jurisdictions.” Naspers shares jumped on the

JSE by 4% on Wednesday after Tencent, in which it is the largest shareholder, reported thirdquarter results that exceeded expectations.

The tech giant reported thirdquarter revenues of $11.7-billion, up by 24% on the same quarter last year. Operating profit of $4.05-billion was up by 22% on a year previously.

“During the third quarter of 2018, we registered strong operating results in our businesses and maintained healthy financial metrics,” said Ma Huateng, chairperson and chief executive of Tencent.

But $1.1-billion was realised from investments, according to Bloomberg, meaning that the underlying growth of the business remains somewhat constrained.

Dim outlook

Eskom has a total coal stockpile of 25 days, down from 28 days earlier in the year, but 10 stations have fewer than 20 days of coal and five have fewer than 10 days of coal, Eskom spokesperson Khulu Phasiwe said.

Fin24 reported the 10 worst affected stations are Arnot, Camden, Duvha, Hendrina, Komati, Kriel, Kendal, Majuba, Malta and Tutuka, all in Mpumalanga. This raises the possibility of load shedding. “Eskom is doing everything possible to mitigate it but the risk of load shedding is very high,” Phasiwe said.

Give and take

China’s loans to sub-Saharan

Africa increased tenfold from $1-billion in 2001 to more than $10-billion annually between 2012 and 2017.

Sovereign ratings agency Moody’s published a report this week saying, although China’s increased lending could lend support to economic growth in the region, it also increased the credit risk of overly indebted countries, whose external positions are deteriorating.

Moody’s says Angola, the Republic of the Congo and Zambia are among the most indebted to Chinese creditors. Ghana, Angola, Zambia and Nigeria used more than 20% of their revenue to pay interest on the loans.

Moody’s says China’s willingness to renegotiate the largely unknown terms of the loans will influence the future credit ratings of these countries.