10 July 2020
The Land and Agricultural Development Bank of South Africa’s liquidity crisis compelled a unit of the South African Reserve Bank to raise credit-loss provisions, highlighting the rising risks of the country’s ailing state-owned companies to the government’s finances.
The SARB’s Corporation for Public Deposits (CPD), which invests deposits from the public sector mainly in short-term debt, became technically insolvent in the financial year through March after liabilities exceeded its assets. That followed a default on securities the institution had bought in the Land Bank and other expected counter-party losses.
To continue operating, the CPD needed a R3.45 billion guarantee from the central bank.
The CPD has never had a counter-party default the size of the Land Bank’s, eliciting the firm’s auditors to make provisions for expected credit losses to meet international accounting rules, said Fundi Tshazibana, a deputy governor of the central bank and the chairwoman of the CPD.
At a board meeting to be held in August, the CPD will set aside more funds to raise the company’s reserves so it can “have a more sustainable business model,” she said.
The need for the CPD to seek its first guarantee since it started in 1984 comes as other sate-run institutions from Eskom, Denel, SAA and the SABC have had to rely on government guarantees or bailouts to avoid collapsing.
The CPD’s liabilities exceeded assets by R2.6 billion after having to account for R1.2 billion in expected Land Bank losses and the balance from other counter-parties, which Tshazibana declined to identify.
South Africa’s National Treasury is working with the Land Bank and a financial adviser on a plan to restore the 108-year-old lender to health, Tshepiso Moahloli, acting head of asset and liability management at the Treasury, said in a recent conference call organized by Rand Merchant Bank.
The plan will be submitted to the finance minister by the end of August, a representative of the bank, which supplies about 30% of loans in the agricultural industry, said by phone.
The Land Bank on Thursday warned of a further default, saying it won’t be able to make interest payments due through July 31 on listed notes issued in accordance with its R20 billion domestic medium-term note program. It continues to work on a solution to its liquidity requirements, the Land Bank said.