[Source: South African Monitor by Heinrich Matthee.]
Parliamentary committee confirms constitutional change
On 15 November 2018 Parliament’s Joint Constitutional Review Committee adopted a report that recommends that the wording of Section 25 of the Constitution be changed to explicitly allow for expropriation without compensation (EWC). The South African President and African National Congress (ANC) leader, Cyril Ramaphosa, made the announcement to amend the Constitution even before the public participation process about expropriation without compensation had been finalised.2 A defective consultation process in the run-up to the report means that any amendments could be challenged in court.3
The ruling ANC announced in February 2018 that it plans to expropriate mostly white-owned farms without compensation. Ramaphosa announced on 31 July 2018 that the ANC will even try to change the Constitution to support such expropriation without compensation. On 22 August 2018, Ramaphosa confirmed that urban land would also be covered by the ANC’s expropriation policies.4
The report of the parliamentary committee will now be referred to the National Assembly for approval, which is likely – given the ANC majority and support from the socialist Economic Freedom Fighters (EFF). Parliament must establish the mechanism for the drafting of the constitutional amendment, be that a special ad hoc committee, or an existing one, in a process that would entail further public hearings. As yet, it is uncertain whether this will occur before the country’s national elections that will take place in May 2019.5
How will European policymakers and foreign investors respond?
It remains to be seen how European policymakers will ensure the interests of thousands of European businesses and tens of thousands of European citizens residing in South Africa.
In April 2018, members of the European Parliament correctly stressed during their meeting with South African counterparts that any expropriation should meet the agreement of the owners in question and that fair compensation should be provided.
The ANC’s support for expropriation without compensation has already served as a red light to many foreign investors. From 2013 to 2017, FDI inflows into the country had already declined from US$ 8.3 billion to US$ 1.3 billion.6 On 31 July 2018, the International Monetary Fund (IMF) warned in its annual Article IV report that the ongoing debate on expropriation without compensation is creating policy uncertainty on property rights and discrediting South Africa’s stated need for foreign investment.7
The South African Reserve Bank stated in November 2018 that it foresees a high risk of lower domestic economic growth in 2019. It mentioned uncertainty about land expropriation as one of the main factors which raise uncertainty about property rights and could affect investor sentiment.8 “If you create uncertainty of some aspects of your environment, and land tenure is one of them, that is one aspect that investors will be looking at,” Sérgio Pimenta, Vice President for the Middle East and Africa at the International Finance Corporation (IFC), the World Bank’s private investment arm, also stated on 14 November 2018.9
Companies and individuals in South Africa may find it harder to insure their properties in future, as the risk of expropriation without compensation is becoming a real threat for insurers. Insurers normally cover the risk of expropriation if it occurs through a series of cumulative acts by the government that eventually diminish the value of a person’s property. However, they mostly do not cover legal expropriation done in accordance with a country’s laws.10
Race-based land reform to divert attention from ANC failures
In the run-up to the 2019 South African general elections and beyond, investors and policymakers will encounter major ANC propaganda campaigns to promote the essentially non-democratic notion of expropriation without compensation. These campaigns will periodically focus on scapegoats like cultural minorities and use racial nationalism to divert attention from the ANC’s governance failures while ruling a one-party dominant order.11
Political economist Moeletsi Mbeki said in this regard: “This is not about land. It is about the loss of votes by the ANC. And the ANC and its little son, the EFF, they think they can bring back the voters who are abandoning the ANC by attacking the white population … Its solution is to attack the white population. Malema is leading the ANC’s election campaign by attacking the white population.”12
Former President Thabo Mbeki’s foundation has also stated in a leaked internal paper that the ANC has abandoned its historical values on non-racialism through its framing of the land reform debate as one of black versus white. The paper points to comments by former President Jacob Zuma in Parliament in February 2018 when he called on “black parties” to unite to obtain a two-thirds majority in order to amend the Constitution to allow for land expropriation without compensation. “Jacob Zuma was advancing a perspective about the ‘resolution of the national question’ radically different from the long-established and historic position of the ANC … as part of this he [Zuma] also made bold to change the very nature of the ANC, characterising it as a ‘black party’.” The current position expressed by some leaders of the ANC on land expropriation without compensation shows that they have “accepted” to be led by the EFF on the matter.13
Racial nationalist discourses by the factionalized ANC and the EFF blaming Afrikaners and whites in general have started to overshadow the non-racialist approach of the Mandela years. However, a senior government panel chaired by former President Kgalema Motlanthe has already concluded that the reason why land reform has not succeeded so far is not the fault of the Constitution or of white farmers, but of government incompetence in dealing with thousands of still outstanding claims, 4 000 state farms not being used for distribution, corruption, misguided policies, an insufficient 1% of the budget allocated to the process, and inefficient government systems, as is the case elsewhere in the economy and security services.14
In fact, according to an Afrobarometer survey in November 2018, a “slim majority” of 53% said government should maintain the “willing seller, willing buyer” policy rather than expropriation without compensation, with only 26% totally disagreeing. Half of black South Africans and 51% of ANC supporters supported this principle, compared to 62% of coloured citizens, 68% of Indians and 73% of white South Africans.15
Economic risks and food insecurity
Serious disruption of the already challenged agricultural sector can have major negative implications for food security in South Africa, as it has done in Zimbabwe since 2000. Electorates in Western countries are unlikely to be keen to support development aid after such deliberate high-risk policies in South Africa.
According to the Banking Association of South Africa (BASA), there has been a decline in the number of farm sale transactions and in land prices processed by South African banks since the proposal to amend the Constitution. The farming community has adopted “a wait-and-see approach”. BASA also observed a decrease in capital investment in agricultural properties. It warned that “prolonged uncertainty” would significantly reduce property values, although banks continued to view agriculture as an attractive sector.16
According to BASA’s Cas Coovadia, banks have lent an estimated 10 billion Euro or more to the agricultural sector based on land as collateral. Several banks and the entire financial system in South Africa could be put at risk if that security is threatened. BASA had stated previously that the Constitution already makes sufficient provision for expropriation.
When the parliamentary committee stated that it had agreed to an amendment to the Constitution, 17 BASA responded: “An amendment that leaves all property or specific classes of property – homes, assets, intellectual property, productive agricultural property, among others – vulnerable to expropriation without compensation, would be a real risk to banks and the country’s ability to attract both local and international investment, grow an inclusive economy and create jobs.”18
According to the Chairman of the Land and Agricultural Development Bank of South Africa, Arthur Moloto, expropriation without compensation could trigger wide defaults that would translate to a loss of 41 billion rand to the government if the bank’s right as a creditor is not protected.19
Owning land in itself is not sufficient for successful farming in arid South Africa. Experience and entrepreneurship, working capital, know-how, machinery, labour, fuel, electricity, seed, chemicals, feed for livestock, security, and water are all essential. Many of the people to whom land has been transferred, have little knowledge of agriculture, with insufficient development of black commercial farming by the ANC.
The ANC’s record of value destruction
The historical challenges and achievements of farmers in successfully developing Africa’s best agricultural sector are insufficiently recognized by many ANC decisionmakers. Meanwhile, in the past decade, the ANC has been a prime destroyer of economic value and democratic institutions in South Africa.20
A report by the Bureau for Economic Research found that South Africa’s economy could have been up to 30% larger and created 2.5-million more jobs, had the ANC-ruled country kept pace with its emerging market peers over the past decade.21 Dr John Purchase, Agbiz’s CEO, stated that poor ANC governance has already made South Africans 25% poorer in the past seven years.22
South Africa slid into recession in the first half of 2018 for the first time in nearly a decade, despite strong global growth. The GDP has already shrunk to its worst in the past nine years and the biggest budget deficit since 2004 remains.23 Unemployment has increased to 27.2%, from 21.5% in 2008. The National Income Dynamics Study (NIDS) report released in November 2018 showed that, in the past two years, the middle class has shrunk from 20% to 18%.24
The IMF in its World Economic Outlook has adjusted its low estimate of 1.5% economic growth in South Africa in 2018 further downwards to 0.8%.25 The consequence is that South Africa is now in its longest downward business cycle phase since 1945.26
Negative foreign business perceptions
This state of affairs is already reflected in foreign business perceptions. According to the Global Competitiveness Index 2017-2018 of the World Economic Forum, South Africa dropped to position 106 out of 136 countries regarding the diversion of public funds, to position 103 regarding the perceived wastefulness of public funds, to position 122 regarding organised crime, and to position 133 regarding the business costs of crime and violence.
South Africa also dropped from position 102 in 2015 to position 118 regarding the reliability of the police, to position 98 regarding the burden of government regulation, from a position of 65 in 2009 to position 114 regarding public trust in politicians, and from a position of 69 in 2009 to position 127 regarding favouritism in the decisions of government officials.27
Eight state-owned entities are still at risk of financial collapse. The expropriation policies, by a factionalized governing party with a record of major value destruction, will further damage foreign business sentiment and South Africa’s economic value.28
Despite foreign government policy initiatives, these policies are unlikely to significantly change the current divestment by international investors and South African companies in the medium term.29 Why would foreign investors choose South Africa with its weakened property rights, when there are many better alternative opportunities?
Ramaphosa’s limping policy reach
President Ramaphosa’s limited control over the factionalized ANC will remain the case until at least after the elections, and probably beyond. The ANC’s ability to manage itself is slowly coming under threat, with its National Executive Committee’s limited authority being shown in several cases.30 The limits to his control will also impact negatively on his ability to manage the negative fallout, more factional and radical demands, and land invasions as a result of weaker property rights and expropriation without compensation.
As Roger Southall, professor of Sociology at the University of the Witwatersrand has remarked, the obstacles in the way of Ramaphosa’s path are formidable. “Ramaphosa is already battling concerted fight-back by the Zuma crowd, and this is only the beginning … In any case, increasingly the ANC has come to function as an extended patronage, jobs and cash machine. Hopefully, Ramaphosa and his team will prove capable of cleansing the upper reaches of the state. But, carrying the fight downwards, into the provinces and local government, will simultaneously mean reforming the ANC. That may well prove beyond the bounds of practical politics, especially given that Ramaphosa himself will need to maintain his support base for an attempt at a second term as president. A more likely second option, therefore, is that even if Ramaphosa does a reasonably decent job, the economy will at best enjoy only slow rates of growth and improvement. Overall, it will do little more than limp along if not actually decline.”31
A stimulus program on flat tyres?
Ramaphosa has tried to restore business confidence with a drive to gain investment, a stimulus package and an economic recovery plan designed to reignite economic growth. However, the wheels of South Africa’s economy are not turning and there is simply no money to fund new, productive investments to stimulate growth. The money markets have not ended the rand’s slide by 20% in value against the dollar this year, and economists have remained sceptical: “The true test will be how much of the stimulus package Ramaphosa will be able to implement, how quickly it can be implemented and whether we can get economic growth from it,” according to Citibank economist, Gina Schoeman.
Daniel Silke, director of the Political Futures Consultancy, has stated that any implementation of a stimulus package hinges on whether the government is able to run itself: “What is the state of the bureaucracy? Are there officials within the state that are patronage-focused rather than performance-focused? How do you clean out that philosophy of patronage to make the state more effective? There are still big question marks that remain before talking about a stimulus.” Tanya Cohen, CEO of Business Unity South Africa, has stated that business does not expect the stimulus package to be a panacea for the country’s economic shortfalls.32
In November 2018, rating agency Moody’s warned that South Africa faced heightened risks due to weak institutions, unpredictable domestic politics and geopolitical risk. Alastair Wilson, Moody’s managing director for global sovereign risk, said South Africa also had below-trend growth prospects: “South Africa’s vulnerability similarly reflects high reliance on external capital (though mainly denominated in local currency), set against a context of a moribund economy, high inequality and political stasis ahead of the 2019 presidential elections.”33
Political pressures to raise extra income for the ANC, its cadre networks in the state structures and key constituencies, will remain high in the next two years. Factional struggles, political uncertainty and shrinking resources will reinforce economic interventionist measures by ANC policymakers. Urban and rural invasions and urban protests due to overheated expectations are also expected to continue to remain prominent in the run-up to the 2019 elections.34
Future scenarios point to lower capital formation
A macroeconomic impact assessment of the policy of land expropriation without compensation has been undertaken by University of Pretoria Gordon Institute of Business Science (Gibs) academic Roelof Botha and University of Johannesburg Professor Ilse Botha. They compared countries that have pursued policies similar to expropriation without compensation, including Portugal, Spain, Romania, Vietnam, Venezuela, Ethiopia and Zimbabwe.
The researchers found that the ratio of capital formation/GDP in these countries declined annually by an average 13.9% after the implementation of such policies. They noted that the public debate about land expropriation without compensation in South Africa had already precipitated a decline in real terms of capital formation by more than 7% over the past eleven quarters.
The authors describe two scenarios based on conservatively estimated declines in capital formation of 5% and 10% a year respectively. In both scenarios, economic recession, escalating financing requirements for government, higher money market and capital market interest rates, as well as a higher cost of servicing public debt will result. This will “crowd-out” the government’s ability to spend funds on poverty alleviation and basic services such as education, health and the maintenance of infrastructure.
“Against the background of the current high level of socio-political unrest in South Africa, the combination of a prolonged recession, higher interest rates and significantly higher unemployment will tend to aggravate the security situation in the country in general. An escalation of criminal activity can also be expected, which will encourage the emigration of highly skilled people, further eroding the country’s international competitiveness.”35
- Dr Heinrich Matthee is a political risk analyst for companies and NGOs in the Middle East and Africa.
- https://www.dailymaverick.co.za/opinionista/2018-07-02-the-farce-of-public-consultation-on-land-expropriation-without-compensation/; https://www.news24.com/SouthAfrica/News/land-the-people-speak-tensions-simmer-in-pietermaritzburg-20180720; https://www.news24.com/SouthAfrica/News/land-the-people-speak-we-are-all-africans-rustenburg-residents-told-20180719.
- https://citizen.co.za/news/south-africa/1933899/anc-admits-land-reform-failure-recommends-security-of-tenure/; https://www.youtube.com/watch?v=eBkzjji9mkQ; https://irr.org.za/reports/freefacts/files/freefacts-june-2018-22-06-2018.pdf; https://irr.org.za/reports/occasional-reports/files/irr-in-britain-notes-tc-11-07-18.pdf.
- https://www.businesslive.co.za/bd/national/2018-10-18-fewer-farm-deals-as-farmers-adopt-wait-and-see-approach/; https://www.thesouthafrican.com/land-expropriation-bosa-concern/.
- https://www.iol.co.za/ios/news/banks-call-for-clarity-on-expropriation-without-compensation-18134092; https://www.iol.co.za/business-report/economy/banks-weigh-in-on-land-debate-16824559.
- https://www.moneyweb.co.za/news/south-africa/sas-land-bank-warns-expropriation-could-trigger-default/; https://www.businesslive.co.za/bt/business-and-economy/2018-08-25-land-bank-boss-tshokolo-nchocho-on-the-dire-consequences-of-expropriation/.
- See https://sa-monitor.com/wp-content/uploads/2018/03/SAM-8-February-2018.pdf.
- Also see http://www.bdlive.co.za/business/trade/2015/05/07/bee-code-change-shocks-industry; http://www.bdlive.co.za/opinion/2015/04/20/why-new-bee-codes-will-pull-the-rug-from-under-business.
- https://www.reuters.com/article/us-safrica-land-cities/south-africas-cities-hold-key-to-ramaphosas-land-plan-idUSKCN1J0145; https://ewn.co.za/2018/07/25/reports-of-intimidation-threats-add-to-tensions-in-zwelihle.
57 700 000 (mid 2018 estimate)
4.5% y/y in May 2019 (CPI) & +6.4 y/y in May 2019 (PPI)
-3.2% q/q (1st quarter of 2019)
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