What government will lose by selling Telkom to bail out SAA
While the sale of its stake in Telkom has been proposed as a way to raise enough money to bail SAA out of its financial quandaries, the South African government also stands to lose in a big way if it goes that route.
Finance minister Malusi Gigaba faces a tough challenge to find the necessary funds to bail out struggling state owned enterprises (SOEs). The minister has said that the national budget cannot sustain SOE bailouts, and so other options are needed to address these financing issues.
SAA in particular has already received a R2.2 billion bailout from the state’s emergency fund, but has another R6.8 billion debt payment due at the end of September. The state’s contingency reserve only has R3.8 billion left in it – and even if that were used, it would leave a R3 billion shortfall.
It has been suggested by Gigaba and economists that one way to pay off these debts, while remaining budget-neutral, is to sell state assets, with the government’s R14-billion-plus stake in Telkom being the suggested sacrifice.
In a market update to investors, research analyst at Nomura, Peter Attard Montalto said that the sale of government assets to finance these bailouts is the “least-worst” option open to national treasury, but it is not without some major drawbacks.
Specifically, selling profitable assets to fill holes in loss-making SOEs basically leaves no cushion for the revenue hole and any expenditure slippage (especially on debt service costs), Attard Montalto said. They also remove net contributors to the budget.
“Asset sales need to be considered in a few different ways,” the analyst said: on the one hand, asset sales make corresponding expenditure budget-neutral – but on the other hand, they come with a perpetual cost of lost income.
“For example, Telkom’s payments of R800 million a year in dividends that currently go to the fiscus would be lost – though arguably this is a saving because dividend yields are normally lower than debt service costs of debt funding the SAA bailout,” he said.
“Equally though, we think SAA cannot possibly be forecast to provide any dividend income to the government over any reasonable time horizon, given its current state. It is also a reduction in state wealth if one considers that this is simply filling a negative equity hole at an SOE for bailouts.”
According to Attard Montalto, as a productive company, Telkom shares can be considered an acceptable investment for the Public Investment Corporation (PIC) – while direct equity stakes into SOEs such as SAA would not be a justified investment in view of their illiquidity and lack of dividend.
“As such, asset sales may well be the least-worst option – better than debt financing – but they further erode future buffer options for minimising current budget misalignments,” he said,
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