Expropriation could bankrupt Land Bank

• A poorly executed reform policy could trigger a potential R41bn bailout from the government

Expropriation of land without compensation could bankrupt the Land Bank, one of the few state-owned enterprises that are not a drain on the country’s finances, and trigger a potential R41bn bailout from the government.

These potential “grim consequences” of a poorly executed land reform policy were set out by Land Bank chair Arthur Moloto after the publication of the lender’s 2018 annual report on Monday.

“We want the rights of creditors to be respected. So if our collateral [land] is taken away, it raises all sorts of questions. And if our rights are not respected, we will have these unintended consequences,” he said at the event attended by finance minister Nhlanhla Nene.

The debate about land rights has intensified since President Cyril Ramaphosa announced on July 31 that the ANC would seek to change the constitution to enable the expropriation of land without compensation, and has been partly blamed for the rand’s decline to its weakest levels in more than two years.

Commercial banks have more than R100bn of loans backed with agricultural land, which means they could potentially see the value of those assets collapse, threatening financial stability.

The Land Bank has assets of R49bn and is one of the largest lenders to commercial farmers with a market share of almost 30%. The bank is profitable and draws on virtually no government guarantees to support its borrowing.

It has also been at the forefront of transforming the agricultural sector, where it has more than doubled its credit extension to black emerging farmers since 2015 to R5.4bn.

Moloto said in his letter prefacing the Land Bank’s annual report that “expropriation” clauses were a feature of about a quarter of the bank’s R41bn in external funding.

Because the bank does not accept deposits in the normal course of its business, it relies almost entirely on funding secured from issuing bonds and short-term commercial paper, as well as loans from development finance institutions such as the World Bank.

Agricultural land is the bank’s primary form of collateral in its lending activity.

Moloto said clauses inserted into these agreements state that an event of default would be triggered if the Land Bank’s operations would be “wholly or substantially” curtailed by any seizure, expropriation, nationalisation, intervention, restriction or other action by or on behalf of any governmental or regulatory agency. A call to “immediately” repay loans amounting to R9bn would prove challenging as the bank held cash resources of R2.4bn.

Failure to repay the R9bn would lead to an even larger event of default that would occur via “cross default” clauses, which means that if the Land Bank is in default with one creditor, then all creditors can demand immediate repayment.

“This would make our entire R41bn funding portfolio due and payable immediately, which we would not be able to settle,” said Moloto. “Consequently government intervention would be required to settle our lenders.”

Moloto said he had raised the issue with Nene and was awaiting feedback.

Land Bank CEO Tshokolo Nchocho said: “We have a fiduciary responsibility to the Land Bank, and as such we have a responsibility to point out the significant risks attached to a change like this.”

Nchocho pointed out that whatever form the policy took, it was vital to have a strong “institutional ecosystem” supporting the development and transformation of the agricultural sector.

“If the government were to expropriate land today, without institutional support measures [such as technical assistance provided by the department of agriculture] and funding measures [such as that provided by the Land Bank] the entire thing in our view would likely be a failure,” Nchocho said.

Insufficient amounts of privately held land were also not a constraint to transformation.

“Land availability could be improved through farms the state has already acquired.”