Agencies sound alarm over state guarantees

2017-02-26 06:02 - Justin Brown
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This week, ratings agencies reacted to the budget speech by raising concerns about the rising government guarantee exposure to public debt, the lack of substantial growth in the country and flagging tax revenue.

Jan Friederich and Mark Brown, analysts at Fitch Ratings, noted Finance Minister Pravin Gordhan’s revelation that government’s contingent liabilities had risen substantially as the guarantee exposure to state-owned enterprises had increased by R52.5 billion in 2016/17.

The 2017 Budget Review showed government guarantee exposure rose from R255.8 billion at the end of February last year to R308.3 billion.

The government has issued total guarantees of almost R478 billion, so state guarantee exposure could rise by up to another R170 billion.

Eskom increased its state guarantee exposure by R43.6 billion; SAA upped its use of guarantees by R3.5 billion; Sanral’s use was hiked by R2.9 billion and the SA Post Office’s (Sapo’s) use climbed by R2.6 billion.

“The government expects to reverse this increase by 2019/20, but political infighting – which revolves partly around the control of state-owned enterprises – makes this uncertain,” wrote the Fitch analysts.

Zuzana Brixiova, senior analyst at Moody’s Investors Service, echoed their concerns about the state of government guarantee exposure.

“While government guarantees relative to GDP are also projected to stabilise, their actual drawdowns are rising and represent increasing risks to government’s fiscal position,” Brixiova said.

In its last rating report for South Africa, S&P Global said the government faced risks from nonfinancial public enterprises with weak balance sheets, which might require more state support.

Adding to the pressure on state finances was the fact that SAA and Sapo needed capital injections.

Gordhan said that during the next few months, proposals for putting the capital structure of SAA and Sapo on a sound footing would need to be agreed upon, and this would include an equity injection for both.

“I cannot tell you where the money will come from,” Gordhan said.

Avril Halstead, the Treasury’s chief director: sector oversight, told City Press this week that Treasury was still in negotiations regarding the capital structure of SAA and Sapo.

SAA, in particular, had problems with its capital structure, Halstead said.

For the year ended March 2016, the cash-strapped state-owned airline reported a loss of R1.4 billion from a R5.6 billion loss in the year ended March 2015.

In another blow to SAA’s profitability, its competitor Comair was awarded about R1.16 billion by the High Court in Johannesburg last week.

Comair had taken legal action against SAA as far back as 14 years ago in respect of the airline’s anticompetitive travel agent incentive schemes.

Halstead said Treasury was working on a plan to recapitalise SAA in a budget-neutral way and gradually over time.

Money would be used from the proceeds of sales of government assets and dividends received and from cash flow sitting in other government departments.

The actual amount and the extent of SAA’s recapitalisation would depend on the airline’s performance and on whether SAA showed progress with its turnaround, Halstead said.

Treasury director-general Lungisa Fuzile said SAA needed a “substantial” capital injection, but declined to say how much.

There would be a first cash injection for the airline in this tax year, he added.

Come mini budget time in October, there would be certainty about how the SAA capital injection would be financed, Fuzile said.

Othelia Groenewald, the Treasury’s director of energy and telecommunications, said extra capital for Sapo would probably be used to capitalise Postbank.

The two Fitch analysts said political and social pressures would test the government’s commitment to fiscal consolidation.

“Sustainable consolidation remains reliant on a still-fragile recovery of GDP growth,” Fitch added.

“The main challenge to fiscal consolidation comes from factional tensions in the governing ANC, which are diverting political energy from economic reform and may lead to policies that raise fiscal deficits or undermine the stability of state-owned enterprises.

“We think political risks to governance and policymaking will remain high at least until the ANC’s electoral conference in December,” Fitch concluded.

Another aspect that emerged from the 2017 Budget Review was that Treasury and the department of public service and administration were working with state departments to reduce headcount.

This included “testing the idea of voluntary severance packages”.

The government headcount, which stands at 1.32 million, was the state’s single largest expenditure, accounting for 36% of costs, Fuzile said.

Currently, natural attrition was being used to reduce the staff count in several departments, but in case this was insufficient, voluntary severance packages were being considered, he added.

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