SAA Bailouts Could Land Us Below Junk

Another SAA bailout, another status downgrade? What effect will Gigaba’s reckless spending have on South Africa?
Jason Snyman
2017-10-03
So, your country is languishing in Junk status. Your credit rating is south of terrible. Investors are fleeing from your shores left, right and centre. The country shows lack of growth. SARS will probably miss their annual tax collection target by billions this year. The pressure is mounting and your state-owned enterprises are clamouring for funds. If Treasury hadn’t stepped in this week, ailing airline SAA would have defaulted on its debt to US lender, Citibank. This R3 billion bailout – the second for SAA in just a few months – will hike the state’s budget deficit, increasing the pressure on our rating. It’s also only a matter of time before Denel, SABC, Eskom or PetroSA form a queue to hold their hands out. Because apparently, that’s how things work nowadays. Back in June, Treasury gave South African Airlines R2,2 billion to settle their debt with Standard Chartered, who now won’t return our phone calls. SAA still owes R5,1 billion to Nedbank, Standard Bank and ABSA. This debt was due at the end of September. Adding to that are debts that most of the public doesn’t even know about. The Comair judgment of R1,9 billion and Airports Company debt. SAA’s lost cabin pressure, so to speak, and is in a vertical nosedive. There’s no business strategy in place and there’s no credible governance structure. Nothing has changed. The airline is haemorrhaging R350 million in losses every month. Why would government approve this bailout and why would they think it’s the right way to go? Why is Malusi Gigaba permitted to raid the National Revenue Fund as he pleases? At this rate, another downgrade in ratings is almost inevitable. So much for the intentions of our February budget review, then.
SAA have recently pulled the plug on more of our routes. We found out just which ones

A Captured Treasury?

Every time SARS fails to hit their tax collection target, Treasury steps in to plug the gap with billions of rands. This creates more and more debt and widens the budget deficit. Treasury will have to figure out how to deal with the outstanding R6.9 billion in SAA debt, and in the meanwhile we’re running the risk of losing even more money. See, these are things closely monitored by credit ratings agencies such as Standard & Poor, Moody’s or Fitch. How will the National Treasury defend these decisions the next time they’re sitting across the room from these agencies? If they were to reassess South Africa’s ability to repay our debt and decide that we’re incapable of actually doing so, South African bonds would be dropped from the World Government Bond Index. This would result in the region of R100 billion leaving the country. The rand will plummet, the interest rates will skyrocket and we’ll be hurled headlong into recession. How do we explain why the completely incompetent Dudu Myeni is still running SAA’s board after three disastrous terms? Why is Gigaba allowed to make decisions without consulting deputy director generals and technocrats at Treasury? Some of his advisors and his chief of staff have links to the Gupta family. Why are they still there? Why is the budgeting process being moved to the presidency for the 2018/19 financial year’s budget? This is supposed to be the core function of the Treasury. How will Treasury make up for the R5,2 billion already handed to a failing, bankrupt SAA? Most countries have already done away with unprofitable national airlines. There is no strategic benefit. Why haven't we shut it down or privatized it? And how does this look to the rest of the world?

SAA – Flogging a Dead Horse?

The SAA board has confirmed that a new CEO will be taking over on the 1st of November. Former Vodacom group executive, Vuyani Jarana, will be the man to take the yoke. His main objective will be to manage SAA back to profitability. They believe this is possible, having penciled in 2019/2020 as a possible turnaround point. But let’s take a look at some other factors. The director-general of Treasury, Dondo Mogajane, has stated that the recent SAA bailouts were the responsible thing to do.
“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.”
SAA is seeking a further R5 billion for its 2018 financial year, followed by R5 billion in 2019 and R3 billion in 2020. Of the R3 billion given to them now, R1,9 billion goes directly to Citibank. R800 million goes to existing service providers and the R300 million or so left over goes toward its monthly loss. That means this bailout isn’t even enough to keep SAA going for one month. So, what happens at the end of October? The government keeps saying that SAA, or owning an airline in general, is a strategic asset. The banks don’t see it this way and nobody else does either, so why are we pouring taxpayer money into a sinking ship consisting of only debt and contractual obligations? The best airline manager in the world probably couldn’t turn this around. Take further into account that if SAA were shut down, that money could go into things like water, sanitation or housing. All SAA does, in effect, is serve the rich to the detriment of the poor. So much then, for post-apartheid business ethics.
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