The ‘hidden’ cost of land expropriation for South Africa: Mboweni

Finance minister Tito Mboweni says that the land expropriation without compensation already risks taking a toll on South Africa’s economy because of the current uncertainty around the policy.

Answering in a written parliamentary Q&A, Mboweni said that the National Treasury has not conducted formal research on the impacts of land expropriation without compensation or undertaken a risk assessment of the impact on the economy.

“However, to the extent that land expropriation without compensation were to generate policy uncertainty, it would have harmful effects on the economy,” he said.

“Several studies have looked at the impact of policy uncertainty on the South African economy. For example, policy uncertainty diminishes the responsiveness of exports to changes in the real exchange rate, as well as introducing harmful short- and long-run level effects on export performance.”

Mboweni cited other research which found that unanticipated increases in uncertainty are linked to declines in investment, private sector employment, output and industrial production, while resulting in an inflationary shock.

“Recent research finds that an increase in uncertainty results in a decline in industrial production and the real effective exchange rate, while fostering an increase in the general price level and 10-year government bond yield.

“These studies have been used to inform the National Treasury’s own assessments of the impact of policy uncertainty on the macroeconomic outlook, which are typically included as part of the macro-fiscal scenarios that inform the budgeting process.”

The ANC has previously said that it expects the policy of land expropriation to be approved by parliament by the end of 2021.

Banking risks

The Banking Association of South Africa (Basa) has warned that the policy could pose a significant risk to the banking sector.

In a submission to parliament in March, the association said that a marked decrease in the value of land-based property, caused by either an amendment to legislation and/or market uncertainty, and the resultant reduced appetite from property buyers, could destabilise the banking sector.

This will also have a negative impact on the credit rating of the sector and the country, it said. The current exposure banks have in relation to land-based property is approximately R1.613 trillion in the form of mortgages.

This amount excludes other types of non-mortgage loans afforded to borrowers premised on their net worth, where their land-based property constitutes much of their net equity base and provides support to lenders for such loans in the event of default  – the market value of land-based property is estimated to be in excess of R7 trillion.

“Many banking crises around the world have as their starting point the decline in land-based property and the impact that this has on market confidence.

“An example of this is the 2007-2008 global financial crisis which started from the downturn of land-based properties in the United States of America.”

It is therefore important that South African land reform initiatives be implemented in a manner that limits any potential destabilisation of the financial markets, whilst still balancing the need for redress, it said.

The association has also raised concerns on the lack of certainty around what will happen to existing bonds and loans should land be expropriated without compensation.

Basa said that expropriation without compensation in its current form does not seem to take into consideration the security rights mortgagees have over immovable property.

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The ‘hidden’ cost of land expropriation for South Africa: Mboweni