Land Bank default forces Sarb into R3.45bn bailout of state investment arm

South Africa’s central bank has issued a R3.45 billion ($200 million) guarantee to bail out the Corporation for Public Deposits (CPD), a government investment arm hit by surging defaults at state agricultural lender Land Bank.

The issue adds a further strain on state finances as the government props up its main power utility and airline, which were already struggling before the coronavirus crisis, and now faces rising defaults at the agricultural lender.

CPD, which purchased various debt instruments from Land Bank, said overall it suffered a R2.8 billion loss in the 2019/20 financial year, necessitating the central bank bailout.

Deputy governor of the Reserve Bank (Sarb) and chairwoman of the CPD, Fundi Tshazibana, told Reuters in an interview this week the guarantee was to cover the investment arm’s losses in the 2019/20 period and replenish reserves, which had dwindled to zero.

“We had to provision for what we will not be able to recover from the Land Bank. That was one of the reasons why we (central bank) had to provide the guarantee,” said Tshazibana.

“Because of the Land Bank default, we were running at a loss and we weren’t going to be a going concern…That would have been of real concern to depositors,” she added.

In April the Land Bank, the country’s largest agricultural-focused lender, defaulted on R50 billion of loans repayments and in June it failed to make interest payments of nearly R120 million.

On Friday the Land Bank told Reuters it had not made interest payments of around R320 million on debt which was due end June.

The South African Treasury guarantees around R5.7 billion of the Land Bank’s debt and last week granted the firm R3 billion rand of emergency equity funding.