South Africa curtails debt guarantees for state-owned companies

South Africa will curtail financial support for cash-strapped state-owned companies as the country battles to reduce dependence on government guarantees and rein in debt to stave off a credit-rating downgrade to junk.

Approved guarantees for debt issued by state-owned companies will decrease by R3.3 billion ($502 million) to R484.4 billion by the end of March, the National Treasury said in its annual budget review on Wednesday, potentially leaving the government on the hook for R979.9 billion of contingent liabilities, rising to R1.04 trillion in the 2020-21 fiscal year.

“Achieving fiscal sustainability requires a combination of continued spending restraint, faster economic growth and measures to contain extra-budgetary pressures – including reform of state-owned companies,” the Treasury said.

Finance Minister Tito Mboweni allocated additional funding to just two of the country’s major state-owned entities in this year’s budget. Arms manufacturer Denel SOC will receive R576 million and South Africa Airways, which was placed in a local form of bankruptcy protection in December, will receive R16,4 billion to pay its creditors.

South Africa’s state companies have drained government finances, with the country’s power producer Eskom Holdings. accounting for 82% of the R162 billion in bailouts allocated to distressed state entities in the past 12 years, according to the Treasury. Moody’s Investors Services, the only major ratings company that still assesses the country’s debt at investment grade, cited rising debt and contingent liabilities as a risk to its creditworthiness.