South African Airways will receive a further ZAR4.8 billion government guarantee by March 2018.
The 2017 Medium Term Budget Policy Statement (#MTBPS2017) tabled by South African Finance Minister Malusi Gigaba today, 25 October 2017, states that government has issued a ZAR19.1 billion guarantee facility to the airline to ensure it continues to operate as a going concern.
“Total recapitalisation of ZAR10 billion will be provided in 2017/18. An amount of ZAR5.2 billion has already been provided, with the remaining ZAR4.8 billion to be transferred by 31 March 2018.”
The funds will be used for working capital and to settle debt, enabling the airline to reduce its interest expenses.
Despite the capital allocation, government’s exposure to SAA debt remains significant at ZAR15 billion.
“There is risk that if SAA’s financial fortunes do not improve, there will be further calls on the remaining guarantee.”.
SAA, which was moved from the portfolio of Public Enterprises to National Treasury in 2014, has been struggling to pay its lenders and service providers.
At the end of September, National Treasury announced that government had approved a ZAR3 billion transfer from the National Revenue Fund (NRF) to SAA to meet its debt obligations to Citibank.
September’s transfer followed on another made in July 2017.
Last week, Treasury announced the appointment of six new members to the SAA board.
The MTBPS notes that the appointment of a new Chief Executive Officer, who will commence his duties on 1 November 2017, is a critical step in ensuring that the airline’s turnaround strategy is aggressively implemented.
In his address, Gigaba says following his meeting with the SAA board, government will make pronouncements on plans to consolidate aviation assets.
“After we meet the new board of SAA, we will pronounce on our plans to consolidate aviation assets and bring in a strategic equity partner. We believe a strategic equity partner can play an important role in SAA’s turnaround as well as unlocking value for the fiscus which has invested significantly in the airline over the years,” says Gigaba.
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.
Minister Gigaba says despite the current challenges faced by SAA, government remains convinced that retaining a national carrier is in the public interest.
The MTBPS, which is also known as the mini-budget, said the profitability of state-owned companies since 2012 has declined due to a combination of operational inefficiencies, governance failures and weak demand.
These factors have increased reliance on borrowing to fund operations, leaving several entities heavily indebted, without sufficient cash to service their debt obligations or even to run their operations.
The document noted that government’s major explicit contingent liabilities are its guarantees.
Government’s total guarantees
Total guarantees issued to public institutions, independent power producers and public-private partnerships stood at ZAR688.8 billion in 2016/17. Total guarantee exposure was standing at ZAR445 billion, because several entities had not fully used their available guarantee facilities.
Between 2011/12 and 2016/17, the combined profitability of state-owned companies (SOCs) measured by return-on-equity, declined from 7.5% to an estimated 0.2% with a growing portion of their operating expenditure being funded through debt.
National Treasury said lenders, alarmed by governance failures, are taking a more active stance and that as a result SOCs are having difficulty raising debt, or are forced to refinance debt at higher rates.
This situation creates liquidity challenges, leading to greater demands on the fiscus.
“Addressing this requires not only stabilisation measures at troubled entities, but a broader restructuring of state-owned companies and an acceleration of SOCs reforms.”
SOCs total interest payments
Meanwhile, total interest payments by state-owned companies are projected to increase from ZAR49.8 billion in 2016/17 to ZAR69.3 billion by 2019/20.
Given the sharp increase in interest commitments, some entities may have insufficient cash to settle their obligations unless immediate reforms are implemented to improve governance and boost profitability.