The Land Bank is getting a R3 billion equity investment from government to recapitalise it. This makes it the only state-owned enterprise getting an in-year spending adjustment from treasury as part of finance minister Tito Mboweni’s covid-19 “emergency budget”.
Mboweni announced the additional support for the beleaguered Land and Agricultural Development Bank of South Africa during his supplementary budget speech this afternoon, which he delivered virtually to parliament.
The highly unusual budget adjustments he announced were necessitated by the covid-19 pandemic and resulting economic crisis, which has seen tax revenues drop and unemployment soar. It has prompted treasury to drastically revise its growth forecasts for the country. The GDP is now expected to contract by 7.2% this year, Mboweni said.
Mboweni and his department have had to find ways to pay for the covid-19 economic stimulus measures announced by pres. Cyril Ramaphosa earlier this year, even while the local and international economies have made a sharp downturn.
In the supplementary budget review document that was released concurrently with Mboweni’s speech, it is declared that the department of agriculture, land reform and rural development is losing R3.3 billion of its budget, while R913 million of that amount is reallocated to provide covid-19 support, leaving the department with R2.3 billion less to spend. Of the covid-19 reallocation, R763 million is earmarked for the food security, land reform and restitution programme, and R150 million for the land administration programme.
A lifeline for the Land Bank
Several farmers’ organisations and agri leaders this week expressed the hope that Mboweni would find money to support the land bank, which they say has a critical developmental and support role to play in the agriculture industry.
“Government will also be allocating R3 billion to recapitalise the Land Bank,” Mboweni said. “This bank holds 29% of South Africa’s agricultural debt. The national treasury is supporting the Land Bank to find a solution to its default and craft a long‐term restructuring plan.”
According to the supplementary budget review document, the bank’s main source of revenue – net interest income – has declined over several years “because lending rates have not increased alongside rising funding costs.”
“The cost of funding increased as the Land Bank tried to reduce liquidity risk caused by the mismatch in its long-dated assets and short-term liabilities. In addition, impairment charges have been increasing, primarily due to persistent drought, further reducing profitability,” states the document.
In January 2020, Moody’s downgraded the bank’s credit rating. It cited its deteriorating financial position, a constrained agricultural sector and fiscal constraints that may reduce financial support. The downgrade led to a significant liquidity shortfall as numerous investors did not refinance debt. Despite government guarantees of R5.7 billion, the bank could not raise adequate funding and defaulted on its debt obligations on 1 April 2020.
“The National Treasury is supporting the Land Bank and its corporate finance advisors as it engages its lenders to negotiate solutions to its default position and craft a long-term restructuring plan to ensure sustainability. The Land Bank seeks an emergency liquidity bridge facility of R3 billion while the restructuring plans are finalised.
“Government is allocating R3 billion as an equity investment to recapitalise the Land Bank, enabling the settlement of this facility. The restructuring plan will inform possible further funding requirements to ensure the Land Bank’s sustainability,” states the document.
Mboweni framed his speech by referring to Ramaphosa as a farmer, tending his crop throught the storm of the covid-19 pandemic.
“As the wise farmer will tell you, when the tempest is raging you must protect your plants from damage. Our Aloe Ferox, like our people, is protected. Mr President, you are the wise farmer, caring for this Aloe Ferox,” he said.
“The storm is not over. But, if we follow the health guidelines and make the right decisions to prepare for a new global reality then, soon enough, the days will grow calmer and our national Aloe Ferox shall go into the new day healthy and strong.”