Enabling the bail-out addict

So much for “deficit neutral” financing of ailing state-owned enterprises (SOEs)! The government has promised for some years now that if financially strapped SOEs were desperate for cash, the Treasury would provide this in a way that would not bump up the fiscal deficit. That’s why the government sold its Vodacom shares to bail out Eskom a couple of years ago — and why it had been hoping to sell Telkom shares to finance the continuing financial catastrophe that is South African Airways (SAA).

Now we are told the government has, yet again, raided the public purse to prevent SAA from defaulting on its loans. Two months ago, it had to cough up R2.3bn to repay a maturing loan that Standard Chartered refused to roll over. This time, the finance minister has stepped in to repay a R1.8bn loan that Citibank would not roll over and he has supplied an additional R1.2bn of cash to top up SAA’s working capital, presumably to help the bankrupt airline pay salaries and suppliers.

The money comes straight from the National Revenue Fund; in other words, it is money contributed by taxpayers. If there was a hope that the government might raid the coffers of the Public Investment Corporation for the cash, it seems to have been dashed by the clear message from Public Investment Corporation CEO Dan Matjila that SAA was not creditworthy enough to lend to.

In any event, SAA urgently needed the cash to repay the maturing loans, which carried a government guarantee. For the government, the real issue was that if SAA had defaulted on even one of the loans, that would have triggered a series of defaults across all SAA’s loans, which would have spread contagion to other SOEs including Eskom. This is because of the “cross default” clauses in many of the bonds and loans that investors and bankers extend to SOEs. The result could have been that the whole SOE house of cards could have toppled over, triggering huge calls on the state’s own balance sheet. That is likely to have prompted an immediate downgrade from the ratings agencies, which have warned of the possibility that the guarantees could be triggered, driving up the public debt ratio to unacceptable levels.

This, essentially, was the rationale the Treasury offered for giving SAA the latest R3bn bail-out, to bring the total to R5.2bn in just two months. That’s a huge sum in the context of a fiscal deficit that is already under significant pressure because tax collection is falling way short. And there will undoubtedly be more calls for cash from SAA, which now can’t borrow from banks or the market — even with a government guarantee — and will soon have to repay more loans.

That SAA’s financial position should have come to this is purely because of blatant state capture, which has stymied all efforts to turn around the badly mismanaged airline over the past several years. In its statement on the R3bn bail-out, the Treasury claims that the appointment of the new CEO, Vuyani Jarana, from November 1 is a critical step in ensuring the airline’s turnaround strategy is implemented. But the inexperienced Jarana has accepted a poisoned chalice: unless SAA chairwoman Dudu Myeni is booted out forthwith and the government is willing to allow Jarana to implement the deep and unpopular cuts required to put SAA back on its feet, it is unlikely any turnaround will succeed.

The Treasury calls SAA a “strategic asset” and an “economic enabler”. The airline’s flag-carrier status is now simply an embarrassment for the country, not to mention an endless drain on its resources, and there is no evidence that SAA is playing any sort of strategic role at all. Unless the government makes some very tough decisions about SAA very soon, chances are the country will carry on throwing good money after bad — money SA cannot afford.

AND THERE WILL DOUBTLESS BE MORE CALLS FOR CASH FROM SAA, WHICH NOW CAN’T BORROW