Agen­cies sound alarm over state guar­an­tees

CityPress - - Business And Tenders - JUSTIN BROWN justin.brown@city­press.co.za

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 sta­te­owned 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 still­frag­ile 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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