Arguably the only rule you need to know in finance is: Capital follows yield.
If you take the “yield” side of the equation away, then capital will find another home and this is a key part of the economic debate around “Expropriation without compensation” land debate.
On Tuesday 27 February, Parliament voted overwhelmingly to investigate and debate the principle of Expropriation Without Compensation (EWC) after a motion was tabled by the Economic Freedom Fighters (EFF). An important distinction here is that it is a motion to investigate the feasibility of it, not the actual implementation of it – which would require the changing of the Constitution.
High-level; the EFF argues that the state should own all the land and simply rent it back to its citizens.
Two key financial issues which will be used to counter this argument:
“Land” is an emotive issue in South Africa and one which needs re-dress. However it is just as much an issue for the Zulu community in KZN – who are currently fighting state efforts to take land held by the Zulu kingdom – as it is for white South Africans concerned about their property ownership rights.
If however, we look at it from a purely economic perspective, there appear to be 2 key issues which can’t be escaped:
- The South African government depends on property rates and taxes to fund the annual budget and maintain social spending initiatives like grants and free education. If one reads the 2017/18 budget, government is forecasting around R16bn in property taxes this year rising to R20bn in 2020/21. If you are no longer the owner of the property, then ostensibly you as the citizen wouldn’t need to pay tax on it. If you read the annual budget report, National Treasury makes the key point that municipalities depend on these property taxes to maintain local infrastructure. In an already skewed tax base, this is one more hole that government will struggle to plug.
- Whether we like it or not, the way the banking sector is structured at the moment depends on the concept of “security” and more importantly the “Security” implied by property rights. It comes down to assets and liabilities. If you want a credit card or a consumer loan or you want to access capital to grow your business, you will need some form of security – banking / financiers assume that your house or your business property is something to put in the “asset” or “security” column – if you take it away, pricing that risk becomes impossible. It’s on this basis that hundreds of billions of Rands are loaned each year generating significant returns for government to fund itself.
In a practical explanation: Over the last 3 days, we have had 3 applications from black-owned agriculture businesses looking for expansion capital for projects ranging from R750 000 right up to R120m for their operations.
With no security or collateral to put up, how do these farmers convince lenders to use their capital to create yield?
There is a populist argument that says that we don’t need foreign investment in our economy and we don’t need to guarantee property rights, but you only have to look at the National Budget to understand that a big reason for the “VAT hike” is that foreign investors were driven out of our economy.
Chapter 2 says:
“South Africa relies on foreign inflows to fund investment because of a low domestic savings rate, as shown by a persistent current account deficit. South Africa received capital inflows equivalent to 1.7 per cent of GDP in the first three quarters of 2017, compared with 4.9 per cent in 2016. In the first three quarters of 2017, net foreign direct investment outflows increased to R65.2 billion, compared with net outflows of R3.3 billion over the same period in 2016. This was driven by a large acquisition of foreign financial assets. Lower foreign direct investment increases the country’s reliance on more volatile portfolio flows, which remained strong through 2017.”
How the private sector will probably respond and why it could be a good thing for the SA economy
You can expect to see a significant increase in efforts to sponsor / expedite title deeds to property owners. Government acknowledges that there is a backlog of more than 700 000 title deeds outstanding. There are a number of initiatives from the likes of the Freemarket Foundation to get title deeds into the hands of property owners.
Why? You can’t take something from somebody who has nothing. When somebody has a piece of paper which confirms that they own their own land and their own property, they are likely to pushback against government efforts to take it away from them. Considering the fine margins in key metros, a great way to secure higher voter participation, is to empower people with property rights.
This drive to empower people with title deeds, will be a great economic enabler as it will allow them access to mainstream funding. If used correctly, this can be a great economic kicker.
700 000 people who have been denied access to the mainstream economy because of no property rights, could be a massive economic opportunity for the entire country to grow the tax base and free up capital for real economic expansion. The “EWC” debate is good and important and should be seen as an opportunity, not a political red-herring.