Bankers wary of gov't sugar sector scheme
In an unprecedented move, the central bank and Banking Supervision Commission (KNB) are teaming up with the government to save an ailing industry.
Under the plan, the KNB and central bank are trying to free up capital for the sugar sector by quelling any concerns bankers would have in lending to domestic producers. Until now, bankers have resisted taking on the risk due to the poor performance of companies and the outlook for the sector. Loaning to ailing companies would only increase a bank's bad loan portfolio and thus provisioning for non-performing loans.
To get banks to sign on to the plan, the government is providing guarantees for loans to the sector and has successfully lobbied the nation's top banker, National Bank of Poland (NBP) chief Hanna Gronkiewicz-Waltz, and banking regulators to rewrite the rules for provisioning. Starting Tuesday this week, all guarantees issued by the Agricultural Market Agency (ARR) will be treated as state treasury guarantees, meaning the banks won't have to create provisioning against such loans, according to state officials.
Bankers, however, are giving the pact a cool reception, questioning the state's resolve to back a sector that is considered by many to be a bad bet.
"It looks like political lobbying," said one senior banking executive who requested anonymity. "And since it was a one-time decision, how should we know that it won't be called off in the same way?"
The government claims the current guarantee program is an attempt to save the cash-strapped sugar industry and a long-standing privatization plan for the sector. But stepping in now likely means getting left holding an empty bag, bankers said.
The sugar sector's current liquidity ratio, which measures the ability to meet short-term debt obligations (cash divided by current liabilities), has been falling steadily over the years, from 1.16% in 1995 to 1.06% in 1996 and 1.05% in 1997, according to an April report by the Institute of Agriculture and Food Economics (IERiGZ). The threshold level that banks consider safe is 1.20%.
In addition, the total amount of the sector's long-term debt increased to almost zl. 300 million ($71.4 million) in 1998, compared to zl. 246 million ($58.6 million) in 1997, while the amount of short-term debt is "larger than the amount of working capital," IERiGZ said.
The current forecast isn't any brighter. Overall, the sugar sector reported zl. 225 million ($53.6 million) in net losses during the first half of this year, with the majority of the 76 Polish sugar mills in the red, according to IERiGZ. Less than 10 of the sugar factories showed a minimum net profit of zl. 7.5 million ($1.8 million), while the rest generated at least zl. 232 million ($55 million) in net losses.
Sources close to the sugar industry agreed that while the present hookup between banking supervisors and the government is not typical, it's necessary if privatization is ever going to take place.
Poland's sugar industry has not kept up with the changes in other agro-food sectors in terms of restructuring and modernization. Privatization efforts to pump money into the sector have stalled under the pressure of unions to protect workers. Moreover, the Russian crisis, which severely curtailed revenue across several sectors, did not miss the sugar industry and further drained revenue streams. Growers and millers saw markets eliminated in the second half of 1998. Overall, total exports plummeted 35% last year, in large part due to the collapse eastward, which had accounted for 75% of sugar exports. A month into this year's harvest, the vast majority of sugar mills are heavily in debt and need more cash to finance this harvest and post-harvest operations.
The government's plan to ease the debt crunch would not only provide cash for this year's operations but would also help regulate the flow of sugar on the market as well as aid a failing privatization scheme, industry members and government officials said.
The sugar market is regulated, they said, and mills have quotas of how much sugar can be produced for domestic consumption and for export. Last year, supply outpaced demand 2:1, according to IERiGZ figures. If mills find themselves cashless they may resort to barter, thereby further glutting the market with sugar and putting downward pressure on prices.
Providing financing to the sugar sector could throw a lifeline to the state's besieged privatization. In 1994, the government launched a plan to consolidate the sector into four holdings in an attempt to streamline operations, improve profitability and take the holdings to the sale's block. Five years later, the process appears to be grinding to a halt.
This summer, trade unions started pushing the idea of creating one big holding called Polski Cukier that would group all non-privatized mills into one state-owned holding. Last month, that further consolidation move received a boost when Solidarity Election Action (AWS), the major partner in the government coalition, threw its backing behind the union proposal.
The government is trying to lift privatization off the ground. The one current tender for the Slask sugar holding has started and government officials recently promised that 75% of the country's sugar mills would find strategic investors.
But here timing is crucial. With the sugar mills in such difficult financial straps, the ministry can't afford having mills go under before they are privatized. Easy access to bank credits is intended to keep the mills afloat until privatization can be carried out, the government said.
