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South African SOE’s future remains uncertain

Article provided by Adams & Adams

The future of the South African economy still hangs in the balance after a testing month for the country’s embattled state-owned enterprises with Eskom and South African Airways (SAA) being severely impacted.

The national airline nears liquidation as strike action between 14 to 22 November revealed it could not pay workers’ annual salary increases. An inquest by parliament noted that the SAA board could not reveal its financial statements due to fear of an auditor disclaimer. Local union Solidarity has warned that the airline is close to collapse and has requested that it be put under business rescue to save its members their jobs.

As for Eskom, which is operating at a loss and has accumulated US$29 billion worth of debt, announced former Nampak head, Andre de Ruyter, as its new CEO as a quick win to allay the going investor concern.
It is imperative to keep a close eye on developments of the two SOEs heading into January when Moody’s is expected to provide South Africa with its next credit rating. If the turnaround plans have not delivered clear results by then, or if one or either of the SOEs is forced into liquidation, it is likely that the country will lose its last investment-grade rating. This would cause large scale capital flight and severely cripple the South African economy.

Though both are in financial distress, SAA is highly susceptible to bankruptcy, and with the country’s largest online ticket vendor, Flight Centre, halting ticket sales on the airline, and Santam Travel Insurance refusing to insure existing tickets (among a number of other service providers), the risk of liquidation is nigh. Acting CEO, Zukisa Ramasia, is putting in place turnaround strategies, but will still require government support in order to lift the airline out of bankruptcy.

Similarly, De Ruyter will be responsible for leading Eskom’s turnaround strategy, which includes splitting the utility into three separate entities, securing close to US$9 billion in bailouts over the next three years, recovering its debts from local municipalities, and cutting its operating costs by US$2 billion a year.

Investors are advised to monitor developments at both parastatals closely, and hedge accordingly should further ratings downgrades take place.

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