Expropriation Act raises risk of destabilising financial institutions – IRR

In 2018, clearly intending to reassure investors and businesses, President Cyril Ramaphosa promised in the London Financial Times that expropriation without compensation in South Africa would not be carried out in a way that would put the economy at risk. But the new Expropriation Act does little to allay this fear, says the Institute of Race Relations (IRR).

“The President insisted that expropriation without compensation would not hinder ‘future investments in the economy’ and that it should not ‘cause harm to other sectors of the economy.’ Unfortunately, his assertions and blanket guarantees are not reinforced by the Act which is vague and grants unbridled powers to the state,” says IRR Campaign Manager Makone Maja. 

Says Maja: “The President has not considered the potential effects of the Expropriation Act on financial institutions and specifically the South African banking sector, which is the largest industry in all of Africa with its total assets constituting 88% of the country’s GDP in 2020.

“The exposure to risks by banks is largely because individuals and companies take out loans to acquire their homes, farms, and land, and that if these properties are expropriated with inadequate compensation or nil compensation, they may no longer be able to pay and fulfil their debt obligations to the bank,” says Maja.

This, Maja says, could pose a risk to the banking sector, and could also mean that banks might be less likely to offer loans to acquire property.

Says Maja, “As a result of the new Act, banks – which mainly use property as collateral – may attempt to mitigate the risks and limit their exposure to uncompensated expropriations by not accepting property that is vulnerable to expropriation – whether speculative land or farms, say − as leverage.” 

The uncertainty of the expropriation with nil compensation clause compounds the risk as the Act explicitly provides for applying it to an open-ended list of circumstances pertaining to property, making the potential reach of this rule endless. 

Maja says banks could introduce stricter thresholds for property loans as a means of mitigating the risks of exposure to expropriations under the Act.

“Wealth creation and economic growth will be slowed. Job creation in vulnerable industries such as agriculture will be ever more difficult,” she says 

The Land Bank, an organ of the government responsible for providing agriculture-specific financial products including loans to assist farmers with acquiring assets such land, equipment and more, highlighted in its 2018 annual report the pressures it contemplated facing if the then Expropriation Bill was passed and poorly executed.

At the time the bank was concerned about the importance of legislation providing it with protections as a creditor. The bank owed debt to external funders and feared that expropriation without compensation would trigger various industry-standard clauses against the breach of the credit agreement and that all the debt they owed would immediately be payable.

Such an outcome could mean that the Land Bank faced becoming yet another failed state-owned entity requiring government bailouts.

“Investors, who are a key driver of economic growth, could grow reluctant to fund the Land Bank in particular and agriculture in general,” says Maja.

The Land Bank argued that when adding up all these potential effects, there was a risk that over time investment levels could dry up and South Africa could attract a greater risk premium due to the perception of higher risk.

Maja comments that further risks may prevail, with all property owners seeing the value of their property falling, and their ability to take out loans or use their property as leverage being curbed.  

“The impact of the Expropriation Act may not be felt immediately, but it will prevail over time. The gradual degradation of the integrated financial system would leave South Africans far worse off, as growth and jobs stagnate and their livelihoods dwindle,” Maja concludes.

Media contact: Makone Maja, IRR Campaign Manager Tel: 079 418 6676 Email: makone@irr.org.za

Media enquiries: Michael Morris Tel: 066 302 1968 Email: michael@irr.org.za