Land Bank down a notch
The Land and Agricultural Development Bank of South Africa on Tuesday gained the dubious honour of being the second state-owned enterprise to be downgraded to effective junk status, with a negative outlook by Moody’s Investors Service.
With Eskom being rated B3 (speculative and a high credit risk) with a negative outlook in November on the back of South Africa’s revised rating to Baa3 (medium grade, with some speculative elements and moderate credit risk), the Land Bank joined with a Ba1 rating (judged to have speculative elements and a significant credit risk).
Eskom and the Land Bank now fall into Moody’s speculative grade, usually considered by money lenders to be unsuitable and less likely to be able to repay creditors.
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,” he said yesterday.
“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 [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.”
Which was exactly what Moody’s did say. “The ratings downgrade reflects Moody’s assessment that ongoing fiscal challenges suggest the SA government will be more selective in dispersing financial support to stateowned enterprises, including to the Land Bank, hence the rating agency limits its government support uplift to three notches, from four previously,” it said in its rating action.
The negative outlook primarily reflects the potentially weakening capacity of the SA government to support the Land Bank in case of need, as captured by the negative outlook assigned to the sovereign rating, and ongoing pressures on the bank’s financial performance.”
“The 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,” its spokesperson, Rebecca Phalatse, said.
It’s definitely a harbinger of how the thinking is going to go.
Mike Schussler Economist