Clucking on SAA runway with no wings

The implications of the Covid-19 pandemic are becoming clear — the economy is being shattered, possibly permanently, and the damage to the fiscus will be so severe and long-lasting it’s doubtful that the country will be able to recover without external help.

There is no consensus yet on whether this means SA will ultimately end up in an IMF structural adjustment programme, though it’s looking increasingly likely.

Some are still hopeful that the pandemic will galvanise stakeholders to accelerate structural reforms, such as liberalising the energy market. If implemented with unusual vigour, this could generate enough growth to prevent SA from tipping into a debt trap — or so the thinking goes.

Others fear that instead of changing tack, the government will compound its errors (and fiscal crisis) by channelling even more scarce funds to failing state-owned companies. Witness its inability to jettison SAA, the funding needs of the defaulting Land Bank, and the likelihood that Eskom, which lost R5bn in just the first three weeks of lockdown, will be facing a cash crunch by September.

The problem is that absent deep economic reforms that boost productivity, postcoronavirus SA will be an even poorer country, riven with even deeper social inequities, but with no growth story and no hope of stabilising the debt ratio.

To put some numbers to SA’s dilemma courtesy of the Bureau for Economic Research: an economic contraction of 9.5% in 2020, combined with the cost of the relief effort, will produce a revenue shortfall of about R280bn by the end of fiscal 2020, and a main budget deficit of about 16%. The domestic bond market is unlikely to be able to fund this.

But the real risk lies in what happens in 2021 when growth does not bounce back sustainably because of the permanent loss of jobs and businesses caused by the pandemic. SA is likely to keep running deficits north of 10% and given its relatively high borrowing costs, slide deeper into debt distress.

So, what are SA’s options, short of going to the IMF? A wealth tax, coupled with a voluntary solidarity bond, could raise a few billion, but nothing sustainable or on the scale required. The worst option would be to resort to prescribed asset requirements and capital controls, because this would scare investors and the blow to confidence would compound the growth shock.

Of course, the Reserve Bank could fund the entire 2020 revenue shortfall by undertaking R280bn worth of quantitative easing (buying government bonds). But the

Bank’is to SA s fiscal likely crisis to baulk is to at this suggestion, not least because it knows the only lasting solution undertake structural reforms.

Some are convinced that China will ride to SA’s rescue, either through a bilateral loan or through cheap funding from the New Development Bank (NDB). Last week, NDB vice-president Leslie Maasdorp said the bank was finalising a $1.5bn loan to SA. But for it to borrow more, he said, SA has to have a plan to show its debt is sustainable because, in the absence of growth, it would have “great difficulty” servicing its debt. In short, SA “had no option” but to implement reforms to resuscitate growth, he said.

As to the naive belief that Chinese money comes with fewer strings, Deloitte’s Martyn

Davies notes that, like all capital, Chinese capital seeks returns based on good governance. Besides, China has previously expressed distaste at investing in our highly leveraged stateowned companies.

So, SA has finally run out of road. The plan to create a new airline out of the ashes of SAA is not the “pioneering” act of renewal the government seems to think it is, but an expression of collective amnesia.

The pandemic has smashed the economy and ignited a fiscal crisis. Soon there will be no money for the basics, let alone airlines. If the government can’t see this, then not even the IMF, as the global lender of last resort, can help us.