State airline bailout raises hackles at South African treasury

South African National Treasury officials are reluctantly complying with orders to find funds to bail out the state airline, fearing they may erode the nation’s fiscal credibility, according to two people familiar with the matter.

The National Treasury is trying to re-prioritize funds in the medium-term expenditure framework due next month to fill the funding hole at South African Airways, said the people, who asked not to be identified because the information hasn’t been made public. The money will have to come from other government departments and programs, and may undermine efforts to revive an economy that’s been battered by the coronavirus pandemic, they said.

SAA, which last made a profit almost a decade ago and has been reliant on state bailouts to survive, has been in administration since December. Finance Minister Tito Mboweni has long argued that the government can’t continue funding the national carrier, putting him at odds with the top leadership of the ruling African National Congress and Public Enterprises Minister Pravin Gordhan, who insist it must keep flying.

Mboweni lost the battle, with SAA’s administrators assuring its creditors last week that the cabinet had committed to providing more than 10 billion rand ($591 million) needed to effect a reorganization of the carrier and avoid its liquidation. Mboweni won’t resign over the decision, one of the people said.

Read more: South African Government to Help Fund National Airline’s Rescue

Government departments have already had to make deep budget cuts after a lockdown aimed at curbing the spread of the coronavirus caused the economy to grind to a near-halt, eroding tax revenue.

The Treasury referred queries on SAA to the Department of Public Enterprises. Gordhan said in a text message last week that the government is “scraping all the barrels” to come up with the funding for SAA, and more clarity will be provided this week. The matter may be discussed at a cabinet meeting on Wednesday.

Bailing out SAA using state funds sends a worrying signal to investors and multilateral lenders that have helped fund South Africa’s coronavirus response, said Peter Attard Montalto, the head of capital markets research at Intellidex.

“Whilst 10.4 billion rand may not be huge, it is only the start of what is needed in the coming years for the airline,” he said in a note to clients. “The government has set itself on a slippery slope.”

The main opposition Democratic Alliance urged the cabinet to liquidate SAA if it couldn’t find investors to take over the carrier and provide the funding it needed.

“It is astounding that there can be any consideration of budget cuts, which will inevitably impact on front-line services such as health, education and policing, when South Africa had to go cap in hand to the IMF to borrow money” to deal with the Covid-19 fallout, said Alf Lees, the party’s finance spokesman.