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SAA bailout hikes pressure on fiscus

Johannesburg - Friday’s move by government to present SAA with a R3 billion bailout will hike the state’s budget deficit and significantly increase pressure on the country’s credit rating. This is the second time this year government has stepped in financially in an effort to save the ailing airline.

SAA is just one of a raft of state-owned enterprises that are struggling – Eskom, the SABC, PetroSA and Denel are also either clamouring for funds or will most likely call for state assistance in the near future.

This is all made worse by the country’s lack of growth, which affects the fiscus further – the SA Revenue Service will probably miss its annual tax collection target by more than R50 billion this year.

The National Treasury released figures on Friday that showed that, for the first five months of the financial year ending August, the budget deficit was R141.4 billion, compared with almost R118 billion at the same time last year.

BNP Paribas economist Jeffrey Schultz said government was facing a dual crunch of revenue shortfalls due to little growth and increasing calls for bailouts from state-owned enterprises, which together increased pressure on the fiscus.

If Treasury hadn’t stepped in this week, SAA would have defaulted on its debt.

On June 30, Treasury bailed out SAA to the value of R2.2 billion to pay back Standard Chartered, which declined to renew its loan facility. This week’s R3 billion lifeline was approved so that SAA could pay back US lender Citibank.

“Government has approved the transfer of funds from the National Revenue Fund to SAA to allow the airline to address the debt obligations to Citibank, thereby avoiding a default,” Treasury said this week.

“Funds will also be used to assist SAA with its immediate working capital requirements,” Treasury added.

Iraj Abedian, an economist at Pan-African Investment & Research Services, said the bailout was definitely not the right way to go because SAA still did not have a new governance structure or business strategy in place.

“Nothing has changed because there is still no strategy. It’s fiscally irresponsible to wait until the eleventh hour because it becomes problematic to the credit ratings agencies and lenders,” he said.

DA MP Alf Lees said the opposition party was disappointed – but not surprised – that Finance Minister Malusi Gigaba had once again raided the National Revenue Fund to settle part of SAA’s debt.

“While the latest lifeboat will keep the wolves at bay, it will not deal decisively with the funding crisis at SAA as the airline is currently incurring R350 million in losses every month,” Lees said.

“Further ratings downgrades and an increased borrowing cost for SAA, the ANC government and state-owned enterprises are inevitable,” he added.

Stalling tax revenues, the recent recession and slow economic growth have led to Treasury being forced to continuously plug the full tax collection gap with billions of rands in extra debt and this, in turn, is widening the budget deficit – a key measure watched by credit ratings agencies.

This means that the intentions presented in February’s budget speech have come to nought.

This year’s budget review contained this statement: “Government remains committed to a measured, prudent course of fiscal consolidation to narrow the budget deficit and stabilise debt.”

Instead, the budget deficit is widening and government debt is rising.

This is bad news for the country’s credit rating, which was already downgraded by S&P Global and Fitch Ratings this year.

Were S&P Global and Moody’s Investors Service to cut their assessment of the country’s ability to repay its debt to junk, South African bonds would be dropped from the World Government Bond Index, which could see in the region of R100 billion exit the country.

Such a massive exit of money would see the rand weaken severely, interest rates would most likely rocket and the country could plunge back into recession.

Treasury has been trying to work out how to deal with the R6.9 billion in SAA debt, which will mature this week, including R1.8 billion owed to Citibank.

The remaining R5.1 billion is owed to Absa, Nedbank and Standard Bank, and was due to be paid yesterday.

Citing client confidentiality, the three local banks declined to comment on their SAA debt and the conditions of the presumed roll-overs.

City Press reported recently that Nedbank had refused to extend loans to SAA because of board chair Dudu Myeni’s continued presence at the bankrupt airline.

The Companies and Intellectual Property Commission has ruled that Myeni’s position as the head of SAA’s board is illegal.

She has served three consecutive terms as a non-executive director at SAA, making her ineligible for further participation on the board.

The director-general of Treasury, Dondo Mogajane, this week said: “As SAA is reinventing and refocusing itself, and as a turnaround strategy is being implemented, the realisation of profits will only come much later. The year we have pencilled in is 2019/20.

“We have a new CEO coming on board on November 1 – the board has confirmed this. We want the CEO to start with a slate that gives him the opportunity to manage this airline back to profitability.”

Former Vodacom group executive Vuyani Jarana will take over at SAA. He will be the first permanent CEO at the airline since November 2015.

SAA is seeking R5 billion from government for its 2018 financial year, followed by R5 billion in the 2019 financial year and R3 billion in the 2020 financial year.

“If any of these state-owned companies default on their obligations, there will be a call across all the guarantees that we have. It has huge implications. So we acted responsibly,” Mogajane said.

Mogajane added that Treasury had engaged with the Public Investment Corporation (PIC), which manages R1.9 trillion in funds held by the Government Employees’ Pension Fund, the Unemployment Insurance Fund and the Compensation Commissioner Fund.

“There are Telkom shares on offer. Government wanted to dispose of Telkom assets. Government had taken a conscious decision that, if we have to look at the option of selling Telkom, we must make sure that the shares remain in the state. That is the conversation that we had with the PIC,” he said.

Bloomberg News reported that Treasury was seeking as much as R100 billion from the PIC, but Gigaba denied that this week.

“There is no R100 billion that we have requested from the PIC,” the minister said.

PIC CEO Dan Matjila said: “In so far as SAA is concerned, there have been discussions.”

Matjila said the PIC had undertaken a due diligence process regarding SAA and the outcome wasn’t favourable in terms of the minimum requirements of its client mandates.

“We are engaging with them about what they should fix,” he said.

“It will take them some time to get to a point where they become investment grade, in which case we’ll be able to put money down. We are not closing them out.”

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