Land Bank downgrade a warning sign for South Africa, says economist

The Land and Agricultural Development Bank of South Africa (LABDSA) on Tuesday gained the dubious honour of being the second state-owned entity – and the first bank – to be downgraded to junk status with a negative outlook by the eternally patient Moody’s Investor’s Service.

With Eskom being rated B3 (speculative and a high credit risk) with a negative outlook in November last year on the back of South Africa’s revised rating to Baa3 (medium grade, with some speculative elements and moderate credit risk), the LADBSA joined with a Ba1 rating (judged to have speculative elements and a significant credit risk).

Eskom and LADB now fall into Moody’s speculative grade, usually considered by money lenders to be unsuitable and less likely to be able to repay creditors. In other words, don’t cry when you lose your investment.

Economist Mike Schussler said it was a warning sign for South Africa.

“It shows government is going to really struggle at the moment. It’s probably a very good indicator we are about to be downgraded,” Schussler said on Wednesday.

“It also makes me wonder about things like the Development Bank of South Africa or Transnet debt, it’s definitely a harbinger of how the thinking is going to go because they [Moody’s] are going to say well, not only do you have to bail out Eskom, it now looks increasingly likely the Land Bank is in trouble and may not be able to meet its commitments.”

Moody’s noted in its rating action: “The ratings downgrade reflects Moody’s assessment that ongoing fiscal challenges suggest the South African government will be more selective in dispersing financial support to state-owned enterprises, including to Land Bank, hence the rating agency limits its government support uplift to three notches, from four previously.

“The negative outlook primarily reflects the potentially weakening capacity of the South African government to support Land Bank in case of need, as captured by the negative outlook assigned to the sovereign rating, as well as on-going pressures on the bank’s financial performance.”

In a statement, LABDSA noted the negative outlook “primarily reflects the increasing risk of a weakening capacity of the South African government to support Land Bank in case of need, as captured by the negative outlook on the sovereign rating”.

“Land Bank continues to engage the shareholder to explore the potential levels of support possible in the current fiscal conditions in order to ensure that it continues to play its critical role in supporting the country’s economic imperatives,” LABDSA spokesperson Rebecca Phalatse noted.

With National Treasury seemingly either unable or unwilling to bail SAA out with yet another R2 billion this week, the LABDSA appeared to low on the list of priorities with both the ANC and Treasury mum on the matter yesterday.

“Any weakening in the South African government’s credit profile or willingness to support Land Bank, could lead to a downgrade,” Moody’s noted.

“In addition, any material further deterioration in Land Bank’s asset portfolio that would also affect its capital buffers, continued uncertainties about its future strategic direction and vacant CEO position that could also lead to a tightening of its funding and liquidity position, would also exert downward rating pressure.”

Schussler said the downgrade meant emerging farmers would find it difficult to find loans.

“Now those loans are going to be more expensive and in areas of the country where we have had a drought, that will put further pressure on those areas,” Schussler said.

Not so subtly putting the problem at governments door, the Land Bank said it continued to “engage the shareholder to explore the potential levels of support possible in the current fiscal conditions in order to ensure that it continues to play its critical role in supporting the country’s economic imperatives”.

In March last year, the LADBSA raised R1 billion through a bond auction, while in September the bank noted it had a strong balance sheet “… which enables it to respond effectively to unexpected negative impacts”.

So, what went wrong?

Phalatse wasn’t able to respond, however, Schussler said this had been coming for at least the last eight to 10 years.

In 2009, then finance minister Pravin Gordhan declared the LABDSA “out of ICU” after, Schussler said, many experts had given valuable time to help right the sinking organisation.

“It was fixed by Dr Herman van Schalkwyk and others. It took a lot of experts from Treasury, experts at banks and agriculture to fix the Land Bank and it has taken another 10 years for it to go down the hole again,” said Schussler.

Moody’s noted there was a low likelihood of an upgrade.

“Land Bank’s outlook could change back to stable, if both the sovereign rating outlook is stabilized and Land Bank is able to stop the deterioration in its asset quality, strengthen its capital metrics and develop and implement a credible strategy for the future,” Moody’s said.

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