Private banks risk losing R125bn if land EWC goes totally pear-shaped - BizNews

27 March 2018 - Parliament’s recent decision to review the Constitution’s property clause to allow expropriation of land without compensation has sent ripples of alarm across South Africa and even abroad.


Peter Fabricius*

Parliament’s recent decision to review the Constitution’s property clause to allow expropriation of land without compensation has sent ripples of alarm across South Africa and even abroad.

And it clearly has large and potentially disastrous implications for banks, which have some R162 billion tied up in agricultural land.

Nonetheless, Nedbank CEO Mike Brown last week put out a soothing message to his shareholders and the country at large.

“Most articles I have read only focus on the piece about land expropriation without compensation – ignoring the fact that Parliament said this was the start of a process [of consultation] and that it must be done without impacting the economy and food security,” he told Fin24.

The Nedbank Group was confident that this consultation process would result in the appropriate level of engagement among all interested parties to ensure the outcome did not impact food security or the economy and was in the best long-term interests of all South Africans.

“Nedbank will be an active participant of that process and the other [banks] too I am sure. Clearly wholesale land expropriation in a way that does not impact the economy or food security is not possible,” said Brown, “and the President has reiterated this by saying this is not, in his words, ‘smash and grab’.”

Brown was surely just whistling in the dark. It is too soon in what is likely to be a tortuous process to be expressing such optimism that the country will be able to square the circle and implement this envisaged land reform policy without seriously harming his and other banks, let alone the wider economy and the country’s food security.

Significantly, Nedbank seems to have been the only bank so far to have expressed its views publicly on the vexed issue. The others are apparently – quite wisely probably – adopting a “wait-and-see” approach. Yet they do not seem to share Brown’s optimism, if one can judge by a recent article written by their collective representative, Cas Coovadia, MD of the Banking Association of South Africa.

He warned on the association’s website recently that public and private sector loans to the agricultural sector totalling roughly R162 billion had been placed at risk by the proposed new land policy. Others have calculated that about R125 billion of that debt is held by private banks and the rest by the state’s Land Bank.

To put it in perspective, that huge banking investment in agriculture completely dwarfs the R50 billion which Coovadia said the state had spent over the last 20 years on various land-reform programmes, 90% of which he said had failed, largely because the new black farmers had not been given title to the land – so they could not raise capital on it.

Likewise, expropriation without compensation would also threaten the R125 billion investment by private banks into the agricultural sector because it would erode property rights, Coovadia said. “Once this happens, land can no longer serve as collateral in support of loans afforded to farmers and agro-processors.”

Ian Matthews, head of business development at banking investment firm Bravura, agrees, explaining that “(l)oan 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,” he has written on Bravura’s website.

Other analysts are more explicit that banks will simply be unable to get their money back if the borrower’s land is seized without compensation. Banks currently rely on their right to foreclose on a property – to take it over and to sell it to recover their costs – if the borrower defaults. But that would not be possible if the state took ownership of the property.

If expropriation without compensation is passed into law, it would give rise to serious difficulties both for property owners and banks which lent money against security over properties.

Pieter Niehaus, director and head of real estate at Norton Rose Fulbright SA, told Fin24: “The owner of expropriated land would lose the rights of ownership and occupation of the land and the bank would lose its security for the repayment of the loan.”

Niehaus added that Parliament would have to clarify if farmers and other borrowers from banks would still be liable to repay the loans if they lost the land. It is hard to see how the borrowers would still be liable, suggesting that banks would lose their money.

Theo Boshoff, legal intelligence manager at Agbiz, told Fin24 that about one third of the investment in agriculture by commercial banks and the Land Bank was collateralised through land. However, even where loans are not mortgaged with land, the income from land is often critical in repaying such loans, as Niehaus told Fin24.

“The expropriation would result in a commercially untenable situation in that the property owner would still be contractually bound to the bank to repay the loan, while having been deprived of the property used for residential, farming or business activities which would in many instances generate income to repay the loan.”

Matthews predicts that expropriation of land without compensation could provoke a crisis in the banking and wider financial industry, because of the large exposure of banks to the agricultural industry.

He said FirstRand Ltd had the greatest exposure, with about 3,6% of its total spending book sunk in agricultural loans, followed by Barclays Africa with 3.4%, Standard Bank with 2%, and then Nedbank with 1%. According to the 2017 Land Bank Annual Financial Report, the state bank also held a “staggering” gross loan amount of R43.3 billion, Matthews said.

“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. It is therefore clear that expropriation which leads to a failure to recover these loans may result in widespread bankruptcy and an ensuing economic crisis which could result in a systemic risk in the banking and agricultural sectors.

“It would be hard to imagine how the banking and finance sector would be able to overcome large-scale loan losses as could arise from expropriation without financial compensation. Government may well have to step in to prop up the banks and other financial market role players under those circumstances, which, given difficulties already experienced at the SOEs (Eskom et al), may be unpalatable to government given South Africa’s perilous financial position.”

Coovadia also forecast significant ramifications beyond the agricultural and banking sectors. The losses of their current investments in agriculture and unwillingness therefore to risk future investment would probably force banks to exit the agricultural sector altogether.

“The resultant decline in food production would not only make food more expensive, but South Africa would need to import food to feed its population, thus driving up food costs even further. Moreover, households would encounter additional financial pressures amid rising inflation, job losses, further credit rating downgrades and generally weak consumer confidence.

Expropriation would also discourage investment in farm technology and innovation, which drives agricultural productivity. “The sector would regress, productivity will be compromised and further job losses will follow.”

Coovadia predicted that South Africa would also face international disinvestment and risk losing economic trade benefits it currently enjoys from initiatives such as the African Growth and Opportunity Act (AGOA) which gives qualified African nations duty-free access to the lucrative United States market.

In 2014, South Africa’s agricultural exports to the US alone were worth R2.9 billion, and were predicted to rise to about R4.5 billion, he said. Coovadia warned that South Africa could lose the AGOA benefits since they were predicated on respect for private property rights. He also suggested drastic land reform could jeopardise South Africa’s huge agricultural exports to the European Union, which totalled some R26.7 billion in 2016.

The investments of EU member states were protected in the many bilateral investment treaties they had with South Africa. Though the South African government recently unilaterally rescinded these treaties in favour of an overarching South African investment protection law, the bilateral treaties would remain in force until their various expiry dates were reached.

“Far from fast-tracking land transfer to previously disadvantaged people, ‘land expropriation without compensation’ will more likely do irreparable Zimbabwe-style damage to the agricultural sector,” Coovadia warned.

“Land for the sake of land without such land being productive is futile. There is therefore an urgent need to review and accelerate transformation in the sector on a market mechanism basis…” he concluded.

Peter Fabricius is a consultant to the Institute of Race Relations.