The threat of land expropriation without compensation (EWC) is likely to deter investment up until the 2019 elections and a while afterwards, says global information provider IHS Markit.
“Uncertainty over property rights is likely to deter fixed investment, limit government revenue and lower overall gross domestic product (GDP) growth, and could ultimately trigger downgrades by international credit rating agencies during 2019,” it notes in a statement published on Friday.
Uncertainty over property rights – at least until May 2019 – is a particularly negative indicator for South Africa’s residential and commercial property market, it adds.
Additionally, any positive turnaround in net foreign direct investment flows, which have been net negative since 2014, appears highly unlikely.
Instead, South Africa has become dependent on highly volatile portfolio inflows to finance its structurally embedded current-account deficits, says IHS Markit, adding that these flows are subject to reversal, reflecting changing emerging-market sentiment and the country’s local currency credit risk ratings.
The weak growth profile is particularly challenging for South Africa's finances moving forward. The South African budget assumes a real GDP growth rate of 1.5% for this year.
IHS Markit believes that growth will be lower, at around 1.2% to 1.3% for the year.
For 2019, the National Treasury projects a real growth rate of 1.8%, but IHS Markit projects real GDP growth of around 1.5%.
The lower growth outlook, combined with less tax buoyancy, will act as a drag on fiscal revenue flows during the upcoming fiscal year.
Further, expenditure overruns due to the above-budget negotiated public-sector wage increases, financial constraints at State-owned entities, and the introduction of free education could all add to the deficit.
The uncertainty over property rights, which in IHS Markit's view will deter fixed investment, limit government revenue, and lower overall GDP growth, ultimately could trigger further downgrades by international credit rating agencies, such as Moody's, during 2019.
Under this outcome, IHS Markit forecasts that the South African rand's exchange rate could weaken by another 10% to 15%, while GDP for 2019 would contract by 2% as both inflation and interest rates spike upwards.
A strict adjustment to the government's spending ceiling over the medium term could, however, prevent a downgrade by Moody's.
Below-budget capital expenditure, the use of the government's large contingency reserves, some partial privatisation initiatives for State-owned entities such as South African Airways, and downsizing the public-sector labour force could increase the likelihood of this more favourable outcome, the company states.
This scenario also assumes greater clarity regarding future property rights as the year progresses.
IHS Markit assesses that credit growth is likely to decline, while banking sector impairments will increase, especially in relation to land or property used as collateral by commercial farmers, in the unlikely event that the ANC pursues wholesale EWC.
According to the South African Reserve Bank, mortgages in the banking sector amounted to R1.4-trillion, or 39%, of the total loan book, at end-2017.
“We estimate that the banking sector's exposure to agriculture debt is R160-billion. EWC would make commercial banks vulnerable to an increase in impairments as bank borrowers who own commercial farms and/or farm houses or land that has been used as collateral effectively could end up with an unsecured loan and loss of the underlying asset, making them likely to default.
“In addition, we expect reduced credit growth as banks will be reluctant to extend new credit, especially to the agricultural sector, while policy uncertainty remains,” IHS Markit points out.
Other lenders will also be affected by wholesale EWC, with State-owned development bank, the Land Bank, likely to be the worst affected, it adds.
The Land Bank has a mandate to provide financial assistance to commercial farmers and agricultural businesses in line with government directions. During the presentation of its 2017 results in Johannesburg on August 21, Land Bank chairperson Arthur Moloto indicated that it has R16.2-billion exposure to long-term loans and loans secured by mortgages.
Moloto added that, if this loan book portfolio were included in the government's EWC plan, it would leave the institution with "a call to immediately repay loans amounting to R9-billion", an obligation that would be challenging for an institution with cash resources of R2.5-billion.
Should the bank fail to honour such initial obligations, it would lead to its other creditors demanding repayment of around R41-billion.
“We expect that the bank would be rescued by the government. In any case, Land Bank is not in immediate jeopardy: it reported a capital-adequacy ratio of 17.3% for the year ended March 2018 versus 17.7% in March 2017, while its non-performing loans ratio fell to 6.7% from 7.1% over the same period,” IHS Markit says.