President Cyril Ramaphosa remains intent on attracting R1.2 trillion in fixed investment by 2023 and so restoring the country’s failing infrastructure. Earlier this week, at a meeting attended by some of the world’s most important development financing institutions – including the World Bank, the European Investment Bank, and the International Finance Corporation – he called for urgent help in achieving this goal.
In his opening remarks at this meeting, Mr Ramaphosa acknowledged that ‘policy and regulatory reforms’ are vital, as the country’s ‘policy and regulatory universe’ contains ‘some of the most elaborate and prohibitive (rules) in the world’.
He also stressed (as Business Day reports) that ‘extraordinary measures are required’ to counter ‘slow growth and deepening unemployment’ and restore failing power, water, and other infrastructure. All of which, he says, have helped to bring about ‘the collapse of industry, divestment from the country, and the erosion of funder confidence’.
Yet only last week, Mr Ramaphosa used his SONA speech at the opening of Parliament to reaffirm his government’s determination to press ahead with amending the Constitution to allow expropriation without compensation (EWC).
Ironically, at a time when the president is busy wooing international development financiers into putting R1.2 trillion into fixed investment, he is simultaneously pursuing an EWC amendment that could derail the domestic financial industry and trigger a major banking crisis.
Under the draft EWC constitutional amendment bill now open for public comment until 29 February (the Draft Bill), many South Africans are likely to face the uncompensated expropriation of their houses, business premises, and farms. What will happen if they have mortgage bonds over these properties and still owe substantial sums to banks on the assets they have lost?
The Draft Bill is silent on this issue, but the Expropriation Bill of 2019 – which ‘the government stands ready’ to enact once the Constitution has been amended (as Mr Ramaphosa said in his SONA speech) – provides an answer.
Under the Expropriation Bill, if the expropriated property is mortgaged to a bank, the mortgage will automatically be terminated on the date of expropriation stated in the notice of expropriation. On that date, ownership will automatically pass to the relevant expropriating authority and any registered mortgage will simultaneously come to an end. This ensures that the bank can no longer foreclose on the property now owned by the state.
However, the loan agreement that was earlier secured by the mortgage does not come to an end. The expropriated owner is still expected to pay off the debt to the bank – but may not have the means to do so. This risk is particularly high, of course, where ‘nil’ compensation applies.
These provisions are largely in line with the current Expropriation Act of 1975, which also provides for the automatic termination of a mortgage bond when ownership of expropriated property passes to the state. Under the Act, however, there is little danger that the amount of compensation – market value, plus an amount to make good all resulting losses – will be less than the loan still owing to the bank. Hence, it is relatively easy for the expropriated owner to pay off the loan and still have something left over.
By contrast, once the state is empowered to expropriate for ‘nil’ (or limited) compensation, enormous financial pressures on both owners and banks are sure to result.
Owners will have lost key assets: for many people, their sole and most valuable properties, built up over a lifetime of endeavour. They will somehow have to pay for new accommodation or business premises – and will struggle enormously to pay off their outstanding mortgage loans as well.
At the same time, the banks cannot write off large amounts of mortgage debt without undermining the confidence of depositors and destabilising the entire banking system. What then are they to do to enforce payment? Push expropriated owners into bankruptcy? Make them sell off their cars and household effects to help pay off their loans?
The wider ramifications will also be severe. House prices will drop sharply and many people will find themselves owing more on their bonds than their houses are now worth. Banks unable to use property as collateral will be more reluctant to enter into mortgage loans and are likely to charge higher interest rates to compensate for the increased risk. Some banks might decide to withdraw altogether from the mortgage market. Home and other loans will become more costly and difficult to secure, further damaging the property market and greatly harming the entire economy.
The Banking Association of South Africa (Basa) has repeatedly warned against these risks. As long ago as September 2018, Basa explained its concerns to the Constitutional Review Committee (CRC) charged with examining whether a constitutional amendment was necessary to implement EWC.
Said Basa managing director Cas Coovadia to the CRC: ‘An amendment to section 25 has the potential to undermine all property rights. As such, it poses a risk to every home owner, business owner and investor. Banks have invested R1.6 trillion of South Africans’ savings, salaries, and investments in property loans. Properties [provide] security for loans, if [this is] needed to recover depositors’ money. Should property values decrease markedly due to legislation or lack of investor confidence, banks and the economy could not absorb the shock.’
Added Mike Brown, chief executive of Nedbank, in a separate presentation to the CRC: ‘[Nedbank] has obligations not only to the eight million clients who entrust the bank to protect their hard-earned savings, but also to the safety and soundness of the entire financial system…
‘Every bonded property that is expropriated without compensation is likely to result in a [bad debt],…even if such a loan remains technically legally due and payable…. [Yet] maintaining confidence in the banking system is absolutely imperative for depositors to feel that their money is safe.’ Without that confidence, moreover, ‘a classical banking crisis’ is likely to result.
So much then for Mr Ramaphosa’s supposed commitment to reform, as set out in his speech to the development financiers. Though he clearly understands how the ANC’s existing policies have damaged growth, employment, infrastructure, industry, and confidence, he still plans to compound that damage by persisting with EWC.
Only a week remains for South Africans to raise their voices against the Draft Bill. If public outrage is sufficiently vocal and widespread, the ANC may be compelled to reconsider. But if public resistance is limited, the ruling party will read the ‘balance of forces’ as conducive to pushing ahead with the Draft Bill.
For all South Africans who want a better life, the first imperative is to deter the ANC from adopting the Draft Bill – and so adding hugely to a policy and regulatory burden that, by the president’s own admission, is already among the most harmful in the world.
- Endorse the IRR’s submission to Parliament, visit https://irr.org.za/campaigns/defend-your-property-rights – each submission counts as an individual parliamentary submission. Let’s get #1million voices to stop #EWC.
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