South African Home Affairs Minister Malusi Gigaba. PHOTO: ANA

Business In The News South Africa

Contingency reserve pared down to offset revenue shortfalls – Gigaba

PARLIAMENT, October 25 – Finance Minister Malusi Gigaba on Wednesday said Treasury’s contingency reserve would be cut down to R16 billion over the next three financial years.

In his maiden medium-term budget policy statement (MTBPS), Gigaba said the paring down of the reserve funds to R3 billion for 2017/18, R5 billion in 2019/20 and R8 billion in 2020/21 would help offset revenue shortfalls.

“This leaves government with little room to manoeuvre should risks to the expenditure ceiling materialise,” the MTBPS said.

In his speech, Gigaba announced other measures to counter the revenue shortfall, including “a mix of expenditure cuts and revenue increases”. He did not give details, saying these would be announced in the main budget in February next year.

The spending cap set by government would remain in place.

“New spending priorities will have to be met by funds reallocated from within existing limits. Any adjustments to the ceiling itself would need to be matched by revenue increases,” said Gigaba.

Gigaba did warn that the expenditure ceiling was threatened in the current financial year by government bailing out South African Airways and South African Post Office.


Finance Minister Malusi Gigaba on Wednesday said government was planning to upgrade the country’s key ports of entry in a bid to improve regional trade and curb slow economic growth.

Gigaba said that there were many opportunities across the Sub-Saharan African region that South African companies could capitalise on as the region’s growth outlook had been renewed and was now expected to recover to 2.6 percent this year, and 3.8 percent in 2018.

The International Monetary Fund (IMF) also expects global growth to average 3.6 percent this year and 3.7 percent in 2018 as a result of recovery in demand and trade in Europe and Asia.

Gigaba said for South Africa to strengthen its medium and long-term growth prospects, the country needed to position itself to take advantage of the improved regional and global outlook.

“Growth outcomes vary across the region, but there are many opportunities. A key opportunity in this regard is to improve regional trade by upgrading key ports of entry, especially Beitbridge (bordering Zimbabwe), which is the gateway to the North-South corridor,” Gigaba said.

“The Department of Home Affairs is working on revamping this and other ports of entry through public-private partnership, which will improve the movement of travellers and trade facilitation.”

Gigaba was delivering the 2017 Medium-Term Budget Policy Statement (MTBPS) in Parliament to set out the fiscal policy objectives and government’s spending priorities over the next three-year expenditure period.

South Africa slashed its projected gross domestic product (GDP) growth forecast for 2017 by almost half, from 1.3 percent to 0.7 percent, as a result of continued decline in business and consumer confidence that has gathered pace since 2014.

Business and consumer confidence are currently at historic lows with direct consequences for investment, job creation and household spending.

Gigaba said growth was subsequently expected to recover slowly, reaching 1.9 percent in 2020.

He said that the development of the Sub-Saharan African region would depend on how South Africa leveraged its global relations and its ability to mobilise both domestic and international resources.

“Regional development requires capacity building in areas of capital markets, tax collection, combating illicit financial flows, infrastructure financing and development and many others,” Gigaba said.

“There is no magic bullet to do this; much depends on the policy choices made and the effectiveness of their implementation.”

South African Airways (SAA) will receive a further R4.8 billion from the state’s coffers in the current financial year, Finance Minister Malusi Gigaba confirmed in his first medium-term budget policy statement on Wednesday, with the money coming in part from the disposal of a portion of the state’s Telkom shares.

Gigaba said government would have the option to buy back the shares at a later stage but was going ahead with the sale to recapitalise the airline to prevent it defaulting on debt payments on government guaranteed loans.

“Government is disposing of a portion of its Telkom shares to avoid a breach, with an option to buy them back at a later stage.”

He added that government was losing tolerance with bailing out state-owned enterprises.

“As the shareholder, we are tired of being dragged into crises by those who we employ to govern and manage state-owned companies. This must end,” he warned.

“The trend of SOCs seeking bailouts to finance operational expenditure, inefficiency and waste must also be brought to an end.”

According to the MTBPS, the additional funds allocated to SAA will be used for working capital and to settle debt.

SAA holds a R19.1 billion government guarantee facility to allow it to remain in operation, and received R3 billion from the National Revenue Fund at the beginning of the month to allow it to repay its debt to Citibank.

Earlier in the year, it was given R2.2 billion to meet its debt payments to Standard Chartered Bank. With the further allocation confirmed on Wednesday, it brings its total bailout funds from the state for the year to R10 billion.

“Total recapitalisation of R10 billion will be provided in 2017/18.”

Gigaba noted that even after the capital injection, and the repayment of a portion of its debt, government’s exposure to SAA debt remains significant at R15 billion.

“There is a risk that if SAA’s financial fortunes do not improve, there will be further calls on the remaining guarantee.”

Gigaba is seen as having worked hard behind the scenes to clinch the removal of  controversial SAA board chairwoman Dudu Myeni, which was announced last week.

He is planning to meet with the incoming board in November and said he would then move ahead with plans to bring in a strategic equity partner for the airline, which has been losing an average R3 billion a year since 2012.

“We believe a strategic equity partner can play an important role in SAA’s turnaround, as well as unlocking value for the fiscus which has invested significantly in the airline over the years.”

Gigaba also signalled that government would review its government guarantee framework to make it more “stringent”.
Eskom holds the bulk of government guarantees, and is using R218 billion of the R350 billion available to it.

Gigaba signalled deep concern over the mismanagement of the power utility and said three steps would be taken to counter it.

Firstly, a new board would be appointed by the end of November, a “credible” executive management team would be put in place and National Treasury would make sure that the company abides by the Public Finance Management Act and accounts for irregular expenditure.

Gigaba said Eskom had in its current state “become a significant risk to the entire economy”.

He reiterated that government viewed both the airline and the power company as critical assets but said they needed to show dramatic improvements in operations and governance.

Malusi Gigaba, said on Wednesday that he was bracing for a sovereign credit ratings review.

The rating agencies will be watching Gigaba’s maiden medium-term budget policy statement (MTBPS) with anticipation after they warned that slow growth at struggling State firms heavily reliant on government bailouts posed significant risks to the country’s ratings.

The MTBPS is government’s plan that sets out the fiscal policy objectives and spending priorities over the next three-year expenditure period.

During a media briefing before the MTBPS presentation, Gigaba indicated that he was hopeful that the credit rating agencies would recognise the strides that the country was making to get out of the slow economic growth quagmire.

But Gigaba said that he would not predict the rating agencies’ decision after the budget.

“We are going to have a conference with the ratings agencies later today after the presentation of the MTBPS in Parliament, and we will have further meetings with them next week and in the coming days. We wouldn’t want to speculate on how they’re going to react to our presentation, but we are going to talk very candidly with them on our challenges and how we are going to get ourselves out of the present challenges,” Gigaba said.

“Out of every tough situation there are opportunities, and the South African economy does have those opportunities.

It is in our hands to change the course that we are currently on. It requires that we change the pace and scale of structural reforms, in particular to deal with niggling challenges at policy level such as and resolving the impasse surrounding the mining sector.”

Fitch Ratings is the only ratings firm that has South Africa’s local and foreign currency debt in sub-investment grade, while S&P Global has South Africa’s foreign currency debt in junk, with local currency debt one notch above junk.

Moody’s Investor Services has both South Africa’s local and foreign currency debt one notch above junk. Moody’s and S&P are scheduled to review the country’s ratings on November 24.

South Africa slashed its projected gross domestic product (GDP) growth forecast for 2017 by almost half, from 1.3 percent to 0.7 percent, following a recession in the fourth quarter of 2016 and the first quarter of this year.

Growth is subsequently expected to recover slowly, reaching 1.9 percent in 2020.

The National Treasury has generated three alternate scenarios quantifying some of the risks to the baseline economic forecast.

Two scenarios involve downgrades to the local currency debt by global ratings agencies.

In the third scenario, global growth improves by an annual average of 0.5 percentage points over the medium term and export commodity prices are five percent higher than the baseline. If that trajectory continues, Treasury expects growth to reach 1.4 percent in 2018 and 2.4 percent in 2020.

The International Monetary Fund (IMF) expects global growth to average 3.6 percent this year and 3.7 percent in 2018 as a result of recovery in demand and trade in Europe and Asia.

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