No money for Denel in Medium Term Budget

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National Treasury has not allocated Denel any funding in its Medium Term Budget Policy Statement, but has given other state-owned entities additional funding.

In the ‘mini-budget’ statement on 24 October, Treasury stated that Denel has a five-year, R3.4 billion government guarantee, of which R2.8 billion has been used. It cautioned that “Denel will struggle to settle maturing debt on its own because its financial position remains weak. While it implements a turnaround plan, Denel will also contemplate the sale of non-core assets to improve its liquidity position.”

Whilst Denel, which is battling to pay suppliers and even December salaries, did not receive any additional funding, Treasury said, it would reprioritise money from unspent funds and tap into the contingency reserve to recapitalise the South African Airways, SA Express and the Post Office.
“In-year adjustments add R17.4 billion to spending, which includes [the] recapitalisation of South African Airways (R5 billion) and the South African Post Office (R2.9 billion),” the ‘mini-budget’ statement said. The National Treasury said South African Express Airways will get an injection of R1.2 billion.

Treasury said, meanwhile, that government’s guarantee portfolio totals R670 billion, of which the largest facility has been granted to Eskom at R350 billion.

By the end of June 2018, R334.2 billion of government guarantee facilities for state-owned companies had been used. Over the next three financial years, guaranteed debt redemptions are expected to average R26 billion, the National Treasury said.
“In recent years, access to credit has steadily declined for many state-owned companies, mostly as a result of their weak balance sheets, poor corporate governance and liquidity challenges. These entities will find it difficult to refinance maturing debt as investors increasingly require guarantees before they will provide financing. As a result, government’s contingent liability exposure is likely to remain high.”

National Treasury said in 2016/17 – the latest year for which figures are available – the combined liabilities of national public entities and state-owned companies totalled R1.6 trillion.

The interest-bearing debt of the 10 state-owned companies that borrow most has grown from R266.7 billion in 2009/10 to R702.7 billion in 2016/17 – an increase of 163 % in seven years. This debt is expected to increase to more than R1 trillion over the medium term, the National Treasury said.

Denel has been battling to pay suppliers and salaries with December salaries apparently now hanging in the balance.e

Some relief could come from Saudi Arabia, with Saudi Arabia Military Industries (SAMI) expressing interest in acquiring a stake. Last week Public Enterprises Minister Pravin Gordhan said the South African government had yet to make a decision on Saudi Arabia’s proposal.

Speaking on the sidelines of the Investment Summit held earlier this month, Gordhan said that a number of countries had shown interest in Denel and other State Owned Enterprises (SOEs).