Thought Leadership

Fight over expenditure cuts shifts to ‘new SAA’

07/05/2020 | By Busiswe Mavuso

THE LOCKDOWN sometimes seems to blur the days into one as we are bombarded with dire news about the economy or the struggles of some of our oldest companies.

Over the past week, 90-year old Edgars and 77-year old Comair have decided to go into business rescue. While these firms were vulnerable before we moved into full lockdown at the end of March, the news points to what is coming as we move into our winter period, where conditions for contagion are more favourable.

While Europe and the US look to open their economies in the face of economic ruin, they have a level of comfort knowing they are opening up in the summer months.

But like them, we are under pressure, with the South African Revenue Service Sars forecasting that state coffers could be poorer to the tune of R285 billion this year. The shortfall could push the government deficit towards 16 percent of gross domestic product. For context, that is more than what Finance Minister Tito Mboweni allocated to health the last time he stood up in parliament delivering his Budget.

Last week, the National Treasury put out estimates based on research from the UN University World Institute for Development Economics Research that suggested the economy could contract by as much as 16 percent this year, depending on the severity of the pandemic and the lockdown’s effects. Our worst-case scenario predicts that as many as 7 million jobs could be shed, meaning official unemployment will shoot up as high as 50 percent.

Mboweni’s Budget speech was perhaps what history will regard as his last play to avoid the country’s fall into full “junk” status. The big statement was planned expenditure cuts to the tune of R130bn that would centre on reining in the growth of public sector wages.

It was Mboweni’s big move, which ultimately wasn’t enough to steer us away from the slide into junk.

However, it did reflect a level of commitment to a dogged fight with public sector related unions, many of which are members of Cosatu, an alliance partner of the governing party. That fight becomes all the more important, because of the revenue shortfall projection by Sars.

This is a fight that has to be won if the government is to maintain confidence that the R500bn raised to stimulate the economy won’t be diverted to ill-considered spending commitments rather than kick starting growth initiatives.

It’s a fight still brewing, but one that can’t be kicked down the road anymore. Which brings me to the tale of our state-owned enterprises SOEs and the burning question of SAA. As a country, we’ve spent billions of tax rand on bailing out an airline that has failed to make a profit.

When it was moved into business rescue in December, there seemed to be an acknowledgement that the State could go no further in bailing out the airline one of the many under-performing SOEs in the government’s portfolio of assets.

But now the state has usurped the powers of the business rescue practitioners and is moving forward with plans to save the airline. The details of this “ pact” are unclear, but there are plans to bring private sector shareholders into a newly constituted airline.

This is a difficult undertaking given that Covid -19 has basically grounded the industry across the world, thinning out the pool of possible investors. One can only hope that whatever the final plans, the state has a minority interest in the airline if it insists on its strategic importance. Any new entity that emerges from this process that still requires a significant capital injection from the state would prove most worrying in light of a contraction that is set to be as much as 16 percent.

The Treasury is in talks with multilateral agencies such as the World Bank and the International Monetary Fund for financial support. Given the global economic conditions, it is in the interest of such agencies not to be punitive to South Africa and the other countries that will need funding.

But if our fiscal road map includes plans for the start of a new state-owned airline and, given our most recent record in managing one in SAA, one wonders what sort of terms will be struck.

This opinion piece first published in Business Report.