Banks keep close eye on effects of drought

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Agricultural industry association AgriSA has described the drought as the worst in 20 years and has established a humanitarian relief fund to collect donations for farmers hit hardest by the natural disaster.

There is still time for recovery

But Ernst Janovsky, head of Absa's agribusiness centre, said the drought was likely to have an effect on its books only around August, as there was still time for recovery if it rained. "So far, the drought has generally had little effect on the financial sector despite this being the fourth year that we have had below-average rainfall," he said. "Absa is also more diversified in its exposure, which would soften the blow that any drought might have."

The bank had not made additional provisions for bad debt arising from the drought, but Janovsky said this might change.

John Hudson, divisional manager of agriculture at Nedbank, said the bank was concerned about the drought's effect on "the economy, agriculture industry and society at large". "As such, we have taken a proactive approach to engage with our affected client base in an effort to deal with this difficult period head-on," he said. Hudson was unable to discuss the effect on the lending book because the bank is in a closed period until its annual report is published in March.

"Thus far, the major share of the drought impact has been borne by primary producers and, in some cases, agriculture secondary players. However, the knock-on impact in the economy and society as a whole is now starting to filter through," he said. "The reality and severity of the drought are now being felt by all water users, not just agriculture."

SA becoming a maize importer

The country might have to import as much as 5-million tonnes of maize, depending on the 2016 harvest, according to GrainSA. Hudson said maize volumes above 1.1-million tonnes would place port and transport infrastructure under severe pressure.

"There is talk of importing maize through Richards Bay harbour, but it is unclear whether this is possible. Another key consideration is the port capacity. Even so, the pressure on the road and rail infrastructure will be enormous," he said.

Some farmers had refinanced existing business loans. Janovsky said this was done on an individual basis through Absa's risk-scoring models, which took commodity and production risk into consideration. "There is no blanket approach," he said.

Source: Business Day