The last two weeks in South Africa have felt like an economic roller coaster. Zuma’s resignation and Cyril Ramaphosa’s appointment as President of South Africa led to the term “Ramaphoria”, and this assisted the ZAR to reach the R11.50/USD level – last seen in February 2015. The 2018 budget speech, presented by former finance minister Malusi Gigaba, and the cabinet reshuffle have created economic uncertainty. And now, barely two weeks later, the phrase “land expropriation without compensation” is on everybody’s lips.

Parliament agreed on February 27 to review Section 25 of the Constitution with a view to amend the Constitution to allow for the expropriation of land without compensation. This was met with surprise and consternation from banks, the agricultural industry and the international investor community.

Ramaphosa said on March 1 in the House of Traditional Leaders in Cape Town that “there will be no smash and grab” of land. He tried to reassure investors that the ANC’s proposal to expropriate land without paying for it will be done responsibly and farming must continue as normal.

The international economic world is watching South African politicians to see how this will play out in changes to the economic policies.

Newly-appointed minister of water and sanitation Gugile Nkwinti said that the ANC would pursue the expropriation of land without compensation, with the aim of increasing agricultural production and ensuring food security is not compromised and that land is redistributed to those who were dispossessed of land during colonial times.

The reality of land expropriation, with or without compensation, looms large for South Africa’s agricultural landowners. Expropriation is a drastic step, which deprives the owner of a property of its ownership rights.

Potential impact for South African banks

Expropriation without compensation could create a systemic risk for the South African banking/financing industry as a whole.

Loan and bond agreements entered into with a bank 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 involved, and how the lender will ever be able to recover the loans granted.

According to the South African government, the major sources of credit for farmers are banks (56%), agricultural cooperatives and agribusinesses (9%) and the Land and Agricultural Development Bank of South Africa (the Land Bank) (30%).

South African banks have a significant exposure to the agricultural industry. According to Bloomberg, farmers have their highest-ever debt with SA banks with a total of more than R125 billion. FirstRand and Barclays Africa Group have the largest proportion of agricultural loans, being 3.6% and 3.4% of their total lending book respectively. Standard Bank’s portion is 2%, whereas for Nedbank it is 1%.

According to the 2017 Land Bank Annual Financial Report, it holds a gross loan amount of R43.3 billion. Also, agricultural cooperatives and agribusinesses provide financial advances to agricultural producers to cover their input costs, which is then repaid once the crop is harvested.

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. Given the debilitating drought of the last few years there has been little investment in the agricultural sector. It would be difficult to see how there will be any further investment in the agricultural sector going forward if expropriation becomes a reality.

Without further clarity on the criteria of expropriation at this point, one would expect that many farmers would have to begin considering strategies to protect their investment against expropriation with the consequent catastrophic financial loss. This may result in farmers restructuring their balance sheets to protect themselves against the potential financial implications of such expropriation of land for no value.

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.