Edition: February/April 2018


Banks at the controls

Minister’s forced landing illustrates the success of activist approach.

In the stand-off between Finance Minister Malusi Gigaba and the banks which have funded bankrupt SA Airways, with the R6,8bn in government-guaranteed loans that matured on Saturday, there can be only one winner. It must be the banks that have agreed temporarily (how temporarily?) and conditionally (on what conditions?) to roll over their loans.

Gigaba is positioned between a rock and a hard place, and only the banks can offer him a way out. It is to agree on a rollover provided Gigaba offers them the comfort of an SAA turnaround strategy likely to work. Unthinkable is that such a strategy can be prepared, let alone implemented, by the existing SAA board whose performance has piloted the airline into its tailspin.

Time has run out, and Gigaba’s options are quickly running out too. He and the banks are now playing in injury time. At best the appointment of a new SAA chief executive, with effect from November, has tentative prospects. Without a supportive board, in which lenders to the state-owned company have confidence, he’ll be stuck before he starts.

It’s for the banks to blow the final whistle on whether to extend their loans, as Gigaba wants, or not, as Standard Chartered and Citibank had decided in respectively recovering R2,2bn and R1,2bn. Unless the incumbent SAA board is replaced by directors competent to salvage the airline, the banks will have no choice but to call up the outstanding monies.

They cannot be complicit in a crash. They aren’t in the business of loan defaults, least of all when they’re avoidable. Neither are they in the business of treating some customers more equally than others.

For Gigaba, facing an exposure of over R16bn in government guarantees to SAA, the choices are narrowing. He’s reaching the outer limits for tax increases.

He cannot keep drawing on the National Revenue Fund, as he has done to supply SAA with working capital and to pay off the two banks that wouldn’t roll over, because it stretches the fund’s purpose from providing for emergencies to paying out subsidies.

He cannot pressurise the Public Investment Corporation without going beyond his authority and without causing it to breach client mandates. This is particularly so in the case of the of the Government Employees Pension Fund, the PIC’s largest client, whose board is constrained by fiduciary obligation and guided by the principles for responsible investment that it proclaims.

He cannot introduce privatisation without inviting the chagrin of political lobbies that find the concept anathema. He cannot sell a good government-owned asset, notably shares in Telkom, without the justification to keep a bad one on life support. He cannot do what the banks will find acceptable, in shaping a board capable of reshaping SAA, without an upset to patronage perpetuation.


The most practical and sensible course is clearly the latter. It’s also the path of least resistance because these days it won’t take much courage to disregard the cohorts of an increasingly vulnerable President Zuma.

More than this, it will be a demonstration to the world that faith in the strength and integrity of SA’s financial institutions is alive and well. Such faith is a pillar against a sovereign-debt downgrade.

These institutions have drawn a line that government cannot afford breach. When push comes to shove, they’ll neither be pushed nor shoved. Stakeholder activism is not only for equity markets but for debt markets too. Bonds are potent bosses.

There’s an unfortunate caveat. The more that institutions steer clear of funding state-owned entities that are badly run, from Eskom and Transnet to Prasa and SAA, the greater the temptation for “prescribed assets” to rear its head; in other words, for government to force the investments it wants.

But there’s also a silver lining in recent experience. When government had to respond to speculation of the PIC being “captured”, it succumbed to the loud message that people don’t take kindly to possible raids on their savings.

This TT article first appeared on BusinessLive/FM, Oct 4.