Government is struggling to borrow R2bn from reticent banks, with Public Enterprises Minister Pravin Gordhan saying members of his ministry are working their “backs off” to ensure the airline survives.
At the weekend, the ANC national executive committee agreed to keep SAA as the national airline “with substantial restructuring” as opposed to other options reportedly mooted by the airline’s business rescue practitioners, including allowing it to be liquidated.
But SAA needs billions of rands to remain a going concern. A consortium of banks has already lent it R2bn to remain in the air, with another R2bn urgently needed. Government is trying to borrow the money from banks.
In an interview Gordhan said numerous meetings and engagements with relevant parties, including Treasury and banks, are taking place daily to find a solution to the cash crunch. “We have been working our backs off to save SAA… our backs off. We are working to find the necessary cash,” he said.
Gordhan did not want to commit to whether there will be retrenchments at the national carrier, but said he is confident that SAA can be saved. “The business rescue practitioners say they’ve got a plan. But there will have to be serious intervention.”
As part of SAA’s business rescue, government pledged to contribute the R2bn, which it planned to borrow from banks.
However, Gordhan may be struggling to convince banks to lend the funds, as the new loans may not come with any government guarantees – unlike in the past.
Every year for the past thirteen years the state has provided guarantees for SAA loans. As the cash-strapped airline has not been able to repay some of these loans, Finance Minister Tito Mbownei had to announce in October that the state would honour the guarantees by repaying more than R9bn over the next three years. And that’s on top of the R16.5bn in bailouts the government provided to SAA over the past decade.
Mboweni drew a line in the sand last year, refusing to provide SAA with more guarantees.
Basically, banks are now being asked to provide a failing business with financing without guarantees, says Maarten Ackerman, Citadel Investment Services’ chief economist and advisory partner.
Government could easily raise the R2bn through issuing extra government bonds, says Ackerman. Thanks to the attractive yields on offer on South African government bonds, demand currently far exceeds what are offered.
“But that would send the wrong signal to the rating agencies,” says Ackerman. “It will add to South Africa’s problems.” The national debt now tops R3trn - 61% of GDP. Mboweni has warned that South Africa's government debt could hit more than 70% soon.
Government is reluctant to guarantee any more loans to SAA because doing so increases its so-called contingent liability (its potential debt) and raises the effective public debt - which is bound to hike the risks of a ratings downgrade, says Dr Azar Jammine, director and chief economist of Econometrix.
“Government is deliberately avoiding taking on more debt to fund state-owned enterprises.”
While the preferable fiscal route may be to close down SAA, the cost of allowing it to go bust will be significant. Government will have to pay back billions of rands in guarantees on outstanding loans immediately, which will hit the fiscus badly. In the past financial year alone, it guaranteed more than R17bn in loans.
But while it will therefore keep SAA operational, Treasury is taking a hard line with the department of public enterprises and SAA by not providing more money. It wants to see more cost-cutting and restructuring.
“It is forcing SAA’s hand,” says Ackerman, which is evident in the carrier's decision this week to cancel 38 SAA flights, and put some of its planes on sale.