When Finance Minister Malusi Gigaba presents his medium-term budget in Parliament next week, one of the items that is likely to get plenty of airtime is the state of the state-owned airline.
There’s a certain irony to that. The budget is a key macroeconomic policy tool, which is crucial for the fortunes of the economy as a whole. But in itself, South African Airways (SAA) is all but immaterial to SA’s economic fortunes.
The airline operates in a competitive market and arguably plays no more of a developmental or strategic role in SA’s economy than any of its more successful competitors. It doesn’t boost foreign tourism or business travel to SA’s shores by offering especially competitive prices on long-haul flights — indeed, it may be a barrier to encouraging more airlines to fly to SA. The state-owned airline’s role as a hub airline for the rest of Africa is increasingly being overtaken by the big Gulf airlines such as Emirates, and its domestic market share could easily be absorbed by others.
The trouble is, however, that while SAA does little to enhance SA’s economic fortunes, its catastrophic finances and equally failed governance have the potential to cause untold damage to SA’s public finances. The risk it poses for the economy is, as economists say, very much to the downside not the upside.
That’s because if SAA defaults on any of its loans, all of its loans could become payable and that means the government’s guarantees for those loans will be triggered.
Even worse is that the cross default clauses in some of the debt issued by other state-owned enterprises could mean that a default by SAA would trigger a cascade of defaults. That in turn would mean that some of the guarantees that the government has written for entities such as Eskom could be called, along with SAA’s, straining the country’s already stretched balance sheet, driving up the public debt level and very likely prompting an instant downgrade by the ratings agencies.
One big question for Gigaba as he goes into next week’s budget is how he proposes to finance the more than R5bn in bail-outs he has already provided to SAA, to enable it to repay loans that Standard Chartered and Citibank have refused to roll over.
Another is how he plans to sort out the governance and management of the airline in time to prevent the other lenders from pulling the plug on the airline as well.
Even if SAA and its shareholder can deliver on the financial conditions, there’s a big question mark over whether they can deliver on the governance and management conditions
Both questions have become particularly urgent in recent days. Since 2014, the government has promised to fund bail-outs to state-owned enterprises on a "deficit neutral" basis and it had, therefore, indicated it would sell its shares in Telkom to fund the SAA bail-outs. It seems a Telkom sale is no longer the plan, at least not now, raising the question of how this departure from previous policy can be justified.
Even more urgent is the question of the conditions that SAA’s domestic and foreign bankers have imposed if they are to extend the maturity of its loans. Domestic lenders agreed to give SAA until the end of October, and even to March, to repay the R5bn it owes them, but there are several conditions, only some of which have been met.
Even if SAA and its shareholder can deliver on the financial conditions, there’s a big question mark over whether they can deliver on the governance and management conditions, which are said to include the long-sought removal of chairwoman Dudu Myeni. They also include demands to put a proper management and restructuring team in place at the ailing airline sooner, not later.
Markets and ratings agencies will be watching very closely what Gigaba has to say about all this next week. The risk if he cannot deliver enough is significant.