Photo: CC0 Public Domain / Publicdomainpictures.net
The Land Bank has become the first state-owned enterprise (SOE) to be downgraded to junk status.
Moody’s rating agency, after monitoring the bank’s financial performance and corporate governance structure over the past year, moved to alter the Land Bank’s long-term issuer ratings from Baa3 to Ba1.
What’s the difference between Baa3 and Ba1?
In assessing a government entity’s (often a lender) financial position in the global banking sphere, Moody’s forms opinions of the ability of an “issuer”, such as the Land Bank, to honour short and long-term financial obligations and contracts.
Baa3 and Ba1 are credit ratings used by Moody’s. The former represents a relatively low-risk investment, while the latter is judged to have speculative elements and is thus subject to substantial credit risk.
Why was the Land Bank downgraded?
In simpler terms, Ba1 status places the credit health of the Land Bank a notch below investment grade. Moody’s considered a couple of factors in arriving at the decision to alter the bank’s long-term issuer ratings.
Firstly, the value of the Land Bank’s assets has diminished over the years.
Its sole purpose is “to serve South African commercial and emerging agriculture by bringing specially designed financial services within the reach of farmers”. However, in 2019 alone, non-performing loans increased to 17.9% (from 3.6%), while impaired loans shot up to 8.8% in the financial year before that.
Much of this was chalked up to the recent drought that hampered the country’s agricultural sector. However, for Moody’s, the rate of instability in the bank’s portfolio was inexcusable.
Secondly, Moody’s noted that uncertainty with the bank’s position on strengthening governance was a key factor in their decision to downgrade its rating to junk status.
“While the rating agency acknowledges initiatives taken by Land Bank to strengthen governance in light of generally heightened attention to South African state-owned enterprises, the prolonged period of uncertainty in relation to appointing a permanent CEO, who will ensure sustained oversight of the bank’s operations and strategic direction, is a cause for concern. For the Land Bank, corporate governance remains a key credit consideration,” the rating agency noted.
‘The latest casualty in the ANC’s continuous governance failures’ – DA
The Land Bank has not had a permanent CEO since December 2018. DA Shadow Minister of Agriculture, Land Reform and Rural Development Annette Steyn MP described the news of the downgrade as “the latest casualty in the ANC’s continuous governance failures at critical SOEs”.
Steyn revealed that questions were put to Agriculture, Land Reform and Rural Development Minister Thoko Didiza after President Cyril Ramaphosa announced, in his State of the Nation Address (Sona), that R3.9 billion would be allocated to the Land Bank in the 2019/2020 medium-term budget.
The party wanted a clear directive on how these funds were going to be used and until this day, no response was ever furnished by the minister.
“The minister is yet to respond to these pertinent questions and in light of this catastrophic downgrade to junk, we need urgent updates on whether any of the R3.9 billion was in fact injected into the bank and whether it has been properly spent on the designated programmes,” Steyn wrote.
The government has not yet issued a statement in response to the New York-based rating agency’s announcement.
