In the Land Bank’s 2018 Annual Report, the top risk on a list of 18 principal risks is unsurprisingly the issue of land reform and the impact of the possibility of Expropriation Without Compensation (EWC).
This risk is described as potentially having an impact on national food security, sustainable farming, the economy and the Land Bank’s sustainability.
Bankrupting the Land Bank
Widely reported on last week was the chairman of the Land Bank Arthur Moloto’s statement in the Land Bank’s 2017/18 Financial Report, that EWC could bankrupt the Bank by setting off a domino effect of defaults that could make the Land Bank liable to immediately repay its entire R41 billion funding portfolio due, which it would not be able to settle.
I warned earlier this year against the systemic impact that land expropriation policies would have on South Africa’s broad banking system. Moloto’s statement confirms that this is a very real threat.
The Department of Agriculture, Forestry and Fisheries (DAFF) estimates the total value of agricultural debt to be R158.3 billion as at December 2017, of which Land Bank finances approximately 29% and commercial banks another 61%. It also records that interest paid by farmers to banks and other financiers during the 12 months up to 30 June 2017 was estimated at R8.8 billion.
Potential for economic and social benefits
While the Land Bank says that the proposal around EWC has taken precedence, it considers improving the overall land reform programme to achieve its stated objectives as a key departure point for the process.
The Land Bank Financial Report states that as part of the broader land reform programme, expropriation (with or without) compensation – if thoughtfully executed – has the potential for some significant economic and social benefits that may accrue to the economy of South Africa in general and to the agricultural sector in particular.
The agricultural sector relies heavily on the availability of land as one of its key factors of production. It is the Land Bank’s view that the land reform process may have a potential positive result if more land is brought into production. The bottom line is that there needs to be a re-alignment and adjustment of the institutional mechanisms to deliver land reform.
In light of EWC, the Land Bank is committed to developing its position on expropriation which will support a long-term sustainable solution.
Additionally, it will quantify the impact on its credit impairments under a number of scenarios.
Given the Land Bank’s promising financials for 2018 which show growth, sound governance and a solid strategy towards sector transformation through considered and appropriate means, it would be foolhardy for the South African government to act hastily. The Land Bank is experiencing growing confidence from the international investment market.
The report shows distinct balance sheet strengths which are articulated through a capital adequacy ratio of 17.3% (FY2017: 17.7%), a liquidity coverage ratio of 214.3% (FY2017: 85.0%), a net stable funding ratio of 108.6% (FY2017: 86.7%) and a non-performing loan ratio of 6.7% (FY2017: 7.1%).”
Despite a downgrade of the Land Bank’s global scale rating from Baa2.za to Baa3.za in line with South Africa’s own investment grading, Moody’s Investor Services upheld the national scale rating of the Land Bank at Aa1.za, with a stable outlook, which is an indication that the bank’s risk profile has improved.
The Land Bank largely depends on funding sourced from the capital and debt markets and depends on commercial investors to fund its commercial and development loan activities.
The bank’s key funding objectives for 2018 are to reduce dependency on short-term investments and the reliance on a small number of funders. The funding strategy aims to raise funds from a wider spectrum of investors including longer-term multi-lateral development funding.
Land Bank’s funding
Land Bank raises various types of funds either through bonds raised pursuant to its listed DMTN programme, short-term commercial paper instruments or bilateral funding agreements to match the Bank’s requirements.
The bank has also entered into funding arrangements with multi-lateral investors such as AfDB, World Bank (US$ 93 million 25-year RSA Government Guaranteed World Bank facility), the German Development Bank (KfW) (EUR55 million not guaranteed over a 10-year period) and the European Investment Bank (EIB) (EUR 50 million not guaranteed over a 12-year period).
In order to secure the KfW and IEB loans, the bank was subject to an intensive due diligence processes which were so successfully passed that the result was being granted funding for up to 12 years without providing guarantees.
Transforming the agricultural sector
Given that finance minister Nhlanhla Nene affirms that the Land Bank is mandated to play a pivotal role in both the growth and inclusive transformation of the agricultural sector, these multi-lateral loans are a positive signal.
The Land Bank loan book indicates that funding for transformative purposes has increased to R5.5 billion in FY2018 from R4.9 billion in the previous year.
The Land Bank is committed to focusing substantively on transformation investments in agriculture. There is a commitment to invest equity in strong agricultural companies with the intent to enable transfer shareholding to black investors on an appropriate basis.
The effect of EWC
However, the effect of EWC on the Land Bank’s carefully constructed and considered funding and transformation strategy is far more complex than the South African government might have considered.
In the Land Bank’s Financial Report, Moloto states that investors would lose their investment appetite. Any funding would be expected to come at an added risk premium due to perceived higher risk levels. Downward pressure would be exerted on the Bank’s thin interest margins and levels of profitability. This would further contribute to a deterioration of its financial sustainability.
According to Moloto, funding agreements typically include Event of Default; Cross Default and Financial Covenant clauses to provide lenders certainty of performance against their loans. Currently R9 billion of the Bank’s debt includes a standard market clause on ‘expropriation’ as an Event of Default.
Additionally, a Cross Default clause would be triggered should the bank fail to pay when these debts fall due because of inadequate liquidity or lack of alternative sources of funding. This would result in the Bank’s entire R41 billion funding portfolio due and payable immediately.
It is thus clear that EWC may lead to a massive failure to recover loans and drive widespread bankruptcy and ultimately a major economic crisis.
It will be critical for EWC to be cautiously implemented so that our financial systems are not toppled through lack of foresight.
We need to ensure that the economy is rigorously protected from negative impacts in order to ensure a sustainable agricultural sector that provides strong agricultural production, employment creation and food security.