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Drought leaves SA farmers owing $7.5 bln to banks

January 17
3:45 AM 2016

The severe drought conditions in South Africa are resulting in increasing bad debts in the agriculture sector. The debt burden of Farmers reached to the highest level at over Rand 125 billion ($7.5 billion). Farmers continue to reel under debt pressure as crops fail and livestock perishes. The combined debt of farmers rose 14 percent in 2015 to Rand 117 billion.

The lowest rainfall is taking a toll on the South African agriculture sector. The worst-ever drought leaves farmers owe over $7.5 billion to banks following the withering cornfields and discouraging the planting of crops. Farmers are suffering from lower yields due to the dry conditions. 

According to Bloomberg, FirstRand Ltd, the biggest bank in Africa, accounts for largest chunk of loans extended to the agriculture sector. FirstRand has 3.6 percent share in the total agriculture loans, while Barclays Africa Group has 3.4 percent, Standard Bank Group has two percent and Nedbank Group has one percent, according to Cape Town-based Harry Botha of Avior Capital Markets.

Harry Botha is the second ranked analyst in the general or specialty financial category of annual survey by South Africa's weekly Financial Mail magazine.

Nico Groenewald, head of agri business at Standard Bank, the continent's biggest lender by assets, said: "Dry conditions would have an impact on profitability because of lower yields, and for some producers it would be a total crop failure. We expect to see some producers under pressure."

The year 2016 is a difficult for South Africa, cautions Rian le Roux, Old Mutual Investment Group Chief Economist. The prevailing slump in commodities markets, tighter monetary, fiscal policy, drought conditions and drop in value of Rand will trigger higher than expected inflation rate, he forecasts, as reported by Fin24

Since 1904, South Africa is witnessing the lowest rain fall, according to South African Weather Service. El Nino, a movement of warm water in the Pacific Ocean causes rise in temperature and drop in rainfall, is the main reason for dry conditions in South Africa. 

The Department of Agriculture has stated that the total debt of farmers was up 14 percent in 2015 to Rand117billion, as reported by eNCA. Generally, grain farmers use debt security for their cultivation operations. Livestock breeders utilize government's guarantees for contingencies during the dry seasons. 

As a result, South African farmers left with most meager corn crop since 1995. The sowing area also became smaller since 2011. South African banks have lent over Rand3.29 trillion to farmers. The accelerating inflation rate and rising interest rates have further worsening the situation for farmers and consumers. 

First National Bank (FNB), FirstRand's consumer unit, is not in a hurry to ease lending and tighten the credit norms for farmers. Dawie Maree, head of information and marketing at FNB Business' agricultural division, said: "FNB has well diversified portfolio of clients and is not over exposed to the agricultural sector."

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