Tuesday 17 October 2017

Moody's Sees South Africa-SAA Bailout Plan as ‘Moral Hazard’

Moody's Sees South Africa-SAA Bailout Plan as ‘Moral Hazard’
(Bloomberg 09/28/17)
Moody's Sees South Africa-SAA Bailout Plan as ‘Moral Hazard’

South Africa’s potential bailout of the state-owned airline could place pressure on the nation’s finances because other government-run companies that are cash-strapped and mismanaged may come to expect the same, Moody’s Investors Service said.

“It generates moral hazards because then larger state-owned enterprises see it and there perhaps will be the perception that the government will always come and bail out, without reforms,” Zuzana Brixiova, Moody’s senior vice president for sovereign risk and its lead analyst for South Africa, said in an interview in London Wednesday.

Loss-making South African Airways needs a recapitalization of at least 10 billion rand ($738 million) and there are plans to strengthen its board, Finance Minister Malusi Gigaba said last month. In addition, the government needs funds for utility Eskom Holdings SOC Ltd., oil company PetroSA and defense firm Denel SOC Ltd., Bloomberg News reported last week, citing two people familiar with the situation.

Eskom plans to raise almost 340 billion rand in the next five years, while meeting 413 billion rand of interest and debt repayments, which amount to 8 percent of South Africa’s gross domestic product.

The power producer is caught up in allegations of corruption related to contracts it signed with companies linked to the Gupta family, who are friends of President Jacob Zuma. It’s also without a permanent chief executive officer and has suspended its finance director. Zuma and the Guptas deny any wrongdoing.

Rating Outlook

Moody’s cut the nation’s ratings to the lowest investment grade in June and kept the outlook at negative, citing declining institutional strength, reduced growth prospects and fiscal erosion from rising public debt and liabilities.

It could reduce the assessment further if there are indications that the strength and independence of the country’s institutions have diminished more or if policy becomes more unpredictable, it said at the time.

The economy emerged from a recession in the second quarter, the jobless rate is at a 14-year high and business confidence is at a three-decade low as political uncertainty intensifies in the lead-up to the African National Congress’s elective conference in December. The ANC is in turmoil because of the scandals that have plagued Zuma, 75, during his eight-year tenure.

“The negative outlook means that there is continued pressure and of course this is a political season,” Brixiova said. “That puts additional challenges on the fiscal outlook.”

The Revenue Service told lawmakers this month that tax revenue in the fiscal first quarter that ended June 30 was 13 billion rand behind target. The government will provide more information in October, when Gigaba delivers his first medium-term budget policy statement.

“Given the size of the shortfall, it is unlikely that the revenue targets will be met this year,” Brixiova said.

While gross domestic product expanded in the three months though June, economic growth for the year is projected to be close to last year’s 0.3 percent.

“South Africa now seems to be in a slow growth trap,” Brixiova said. Read more at:https://www.bloomberg.com/news/articles/2017-09-27/moody-s-sees-south-af...

By Selcuk Gokoluk

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