Thursday, April 23, 2020

Default at South Africa’s Land Bank Increases Pressure on Ramaphosa
Century-old agriculture lender is latest state group in need of government support

The bank is responsible for more than a quarter of loans to South Africa’s farmers © Waldo Swiegers/Bloomberg

Joseph Cotterill
Financial Times
Johannesburg APRIL 21 2020

South Africa said it was working to avert the financial collapse of the country’s century-old agricultural bank, after the lender to farmers across the country missed a loan repayment to a key creditor.

The state-owned Land and Agricultural Development Bank of South Africa (Land Bank), founded in 1912, is the latest South African public enterprise to face financial difficulties, increasing the pressure on President Cyril Ramaphosa’s cash-strapped government as it scrambles to free up fiscal resources to manage the effects of the country’s coronavirus lockdown.

The South African Treasury said on Tuesday that it was supporting Land Bank’s talks with its lenders, and had appealed to creditors not to use the default to call in their own debts but to continue “supporting and lending to assist in managing pressure on the fiscus at a time of limited fiscal space”.

Land Bank said on Monday it was unable to repay one lender’s revolving credit facility and had launched talks with all of its creditors to prevent the missed payment from triggering other demands for repayment on billions of rand in debts, describing its current problem as a “liquidity shortfall.”

The bank is responsible for more than a quarter of lending to South Africa’s farming sector. Most of its borrowers are large commercial farmers but it is also mandated to lend to smallholders under efforts to expand the involvement of the country’s black majority in farming.

South Africa’s farmers increased borrowing in recent years after prolonged drought conditions in many parts of the country led to crop failures, and used funds to expand cultivation of higher-value products, such as fruits for export.

But increased borrowing from farmers has been accompanied by a gradual restriction in Land Bank’s own access to funding, after rating agencies downgraded it’s credit score due to concerns over its finances, pushing it deeper into junk status.

Funding pressures on the bank worsened after South Africa’s credit rating was cut to junk by Moody’s last month, sending Land Bank’s own rating even lower.

The Treasury provided Land Bank with R5.7bn ($300m) of state guarantees earlier this year, as its financial positioned worsened. Further guarantees or recapitalisation are possible but will need reforms to the bank's funding model, the Treasury said.

The government is already propping up other struggling state companies, and last month cut off further funding to the national airline, South African Airways, which is on the brink of collapse.

Land Bank said it was in consultation with the creditor over the missed payment and was seeking “a waiver and an extension of the repayment date in relation to the said default”. It declined to release the name of the bank.

Despite the challenging financial conditions, Wandile Sihlobo, chief economist at South Africa’s agricultural business chamber, said crop production was expected to rebound this year. “The level of debt [across the sector] on its own is not necessarily worrying,” he said.

There is about R168bn of agricultural debt outstanding in South Africa, according to the latest available figures.

Good late-season rainfall is expected to lead to bumper grain harvests this year, though analysts have warned that exports, particularly to other African countries, could be affected by the pandemic.

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