Money makes the world go round, but what happens when expropriation without compensation (EWC) whirls it the other way? South Africa’s financial sector is about to find out.
Although not as stigmatised as commercial farmers, bankers enjoy little public sympathy in South Africa. It is hard to imagine someone says, “I feel sorry for those bankers”. But if you own a durable asset, house, car, stock, bond, or business, you probably already have a banking relationship. If you want to protect yourself from risk you need insurance, and if you want to turn future income into present ownership, you need banks too.
For all its value South Africa’s unloved financial sector is threatened at least from three sides. First, its valuation has dropped profoundly, partly due to the Covid-lockdown-crunch. Between mid-February 2020, and mid-February 2021, the JSE’s top 15 listed financial companies lost 17.8% of their market value.
But between mid-February 2018, when newly elevated President Ramaphosa promised expropriation without compensation (EWC) in his maiden SONA speech, and mid-February 2020, the same index dropped by 18.2%, which is worse. Even the advertisers of the famous presidential “investment drive” admitted it was being subverted by EWC.
Moneyweb tracks a larger index of South African financial service companies, which paints the stark picture more broadly. In the year since mid-February 2020 to date, this index fell by 16.4%, but between mid-February 2018 and mid-February 2020, it dropped by 25.2%.
Overall, the top 15 financial companies are down a total of 32.8% since EWC was announced, and Moneyweb’s larger index is down 33.2%. A third of their value is gone. On both indexes, most of the value was lost before Covid-19.
This is important because lockdowns will not last forever, and the worst has come and gone. EWC, on the other hand, is a bane whose worst is still to come.
The second threat is a more general reduction in wealth across the nation, which matters because the purpose of finance is to turn wealth into more wealth.
Between 2017 and 2019, according to SARB data, gross fixed capital formation in machinery and equipment declined 4%, in residential buildings it declined 7.5%, and in non-residential buildings, it declined 16.5%. Over these two years, private saving was negative, and inflation-adjusted household wealth declined too.
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If one looks at a more fine-grained quarterly basis, the decline in hard investments since Ramaphosa’s EWC announcement was 8% pre-Covid-19. Include the Covid-lockdown crunch and capital formation is down 22% as of September 2020.
In short, the financial sector’s value has gone down by a third and, to make matters worse, it lies on a weakening wealth stock from which to “rebuild”.
The third threat is well known. Even Treasury predicts that on current trends, South Africa faces “a sovereign debt crisis”, meaning the government is borrowing so much it soon will not be able to repay its own debts or itself. The connection between this fact and the financial service sector is too often overlooked.
Ratings agencies repeatedly, and famously, downgraded South African government debt to “junk” and worse, but Fitch, one of the major ratings agencies, also downgraded South African private banks twice in 2020 too.
“Fitch considers that the South African banks cannot be rated above the South African sovereign given the high concentration of their activities within South Africa and significant sovereign exposure (dominated by government debt but also includes that of public-sector corporates) ranging between 175% and 245% of the banks’ capital at end-June 2020”.
Put another way, private banks have lent government more money than they have so that if government fails to repay its debts the financial sector will suffer directly. Private banks and insurers will also suffer indirectly since a sovereign debt crisis will trigger exchange controls and/or a collapse of the rand in which most banking and insurance assets are denominated.
But is EWC really connected to the triple threats of devaluation, dilapidating wealth, and dangerous government debt? Yes.
Devaluation of the financial services sector is directly related to a private lack of trust in the government-secured market’s ability to produce and meet private needs. Nothing declares the government’s lack of faith in the market quite like EWC. And if the government lacks trust in the very market it is meant to protect, why should any investor?
Second, degrading infrastructure, crime, evaporating skills and a shrinking high net-worth base are driven by maladministration. This in turn shrinks the wealth stock upon which finance depends. The hard task before government is making South Africa a more attractive place in which to live and work; the short circuit is EWC, which can be used to fund more maladministration while driving wealth down further.
Third, a “sovereign debt crisis” is just another word for EWC. When the government borrows your money, promises to pay you back, and then does not, it has expropriated your wealth without compensation. This would be a very real threat even in the absence of the Expropriation Bill, but politically, an affirmation of EWC through this legislation gives debt default the veneer of social justice. That in turn makes the default politically more appealing.
The financial sector is getting screwed into a coffin, and each turn of the screw makes it all the harder to undo. Its burial may take years as healthy businesses turn zombie. The tombstone, once unveiled, will read “RIP – EWC”.
Gabriel Crouse is a writer and analyst at the Institute of Race Relations, a liberal think tank that promotes political and economic freedom
