Budget 2023
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SAA bailout will blow lid off expenditure ceiling if Gigaba’s plan fails

Cape Town - Finance Minister Malusi Gigaba needs to sell government-owned assets such as its stake in Telkom or his budget will breach the expenditure ceiling by R3.9bn.

The breach will be as a direct result of Gigaba’s decision to bailout South African Airways (SAA) with a R10bn appropriation, as well as a R3.7bn recapitalisation of the South African Post Office.

“Expenditure is expected to breach the ceiling by R3.9bn in the current year,” the 2017 Medium-term Budget Policy Statement (MTBPS) states.

“This is the result of large appropriations for SAA and the SAPO. In combination, these allocations amount to R13.7bn.

“Government is considering the disposal of assets to offset these appropriations. Should such disposals take place, the breach will not occur.

“We aim to avoid a breach of the expenditure ceiling this year through the disposal of assets,” Finance Minister Malusi Gigaba said in his mini budget speech.

“The fiscal framework is at risk of being breached so we need to sell assets to raise that R3.9bn,” he told a media briefing before his speech. “We think that we have a solution and we will make a very confirm commitment that we will not breach the ceiling.

“The impact would be quite severe if we breach the ceiling,” he said. “If we cannot maintain the fiscal ceiling, what confidence should the rating agencies have that over the medium term we will maintain the fiscal framework that we have outlined?

“If government is sitting on assets, then let us use those assets.”

Telkom is a prized asset

Gigaba had proposed selling government’s full R13bn stake in Telkom, but revealed in his speech that they will likely only sell a portion of its stake.

"To ensure the expenditure ceiling is not breached, we have decided to dispose of a portion of government’s Telkom shares, with an option to buy them back at a later stage," he said in his mini budget speech.

"We do not take this decision lightly, but we have had to in order to maintain the credibility of the expenditure ceiling."

Treasury director general Dondo Mogajane told media at the press conference on Wednesday that they are now evaluating a broader set of assets, which could still include their shares in Telkom.

“Telkom is a well performing share, contributing R900bn in dividends every year,” he said. “It is important that we hold on to that as much as we can.”

He said a decision regarding the asset sales will be made by March 2018.

Government has issued a R19.1bn guarantee facility to SAA to ensure the company continues to operate as a going concern, the mini budget showed.

Total recapitalisation of R10bn will be provided in 2017/18. An amount of R5.2bn has already been provided, with the remaining R4.8bn to be transferred by 31 March 2018, the budget explained.

“These have been partially offset by use of the contingency reserve,” they said.

Treasury said that these funds will be used for working capital and to settle debt, enabling the airline to reduce its interest expenses. "Even after the capital allocation, government’s exposure to SAA debt remains significant at R15bn," it said.

Hope that new board, CEO will prevent further bailouts

"There is risk that if SAA’s financial fortunes do not improve, there will be further calls on the remaining guarantee.

"A new, full-strength board has been tasked with returning the airline to financial sustainability.

"The appointment of a permanent chief officer, who will start on 1 November 2017, is a critical step in ensuring that the airline’s turnaround strategy is aggressively implemented.

"If SAA executes a successful turnaround in line with its projections by 2019/20, its reliance on guarantees will subside, as will government’s risk exposure.

"Government stepped in to bail out SAA, preventing a call on guarantees or the liquidation of the carrier.

“Government granted South African Airways R5.2bn to address debt obligations. This allowed SAA to avoid default, roll over some debt and continue negotiations with lenders.

“A permanent chief executive officer (Vuyani Jarana) has been appointed and the appointment of a chief restructuring officer is under way.”

* Visit our Mini Budget Special Issue for all the news, views and analysis.

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