Denel may struggle to recover its position financially

South Africa’s premier defense company, Denel, has been pushed deeper into a liquidity crisis as the firm could reportedly run out of cash by the end of March 2021. Despite the fact that Denel has received numerous bailouts from the South African Government in the past, it has been unable to turn the substantial capital injections into concrete growth thus far. With the company’s survival in question, it may prove difficult for Denel to recover its position financially, even with the requested state approval of additional funding, says GlobalData, a leading data and analytics company.

According to GlobalData’s report, ‘South Africa – FY 2020 Defense Budget Analysis, Competitive Landscape and Forecasts’, Denel has been the primary South African exporter company for defense equipment, accounting for 21 of the 36 contracts executed between 2015-2019. The two main export categories during the same historic period were Missiles and Armored Vehicles, within which Denel famously offers products such as the Umkhonto-IR surface-to-air missile (SAM), the ZT3 Ingwe anti-tank missile, Casspir and Mamba APCs, and the RG-31 Nyala Armored Vehicle.

Victoria Bosomworth, Associate Aerospace and Defense Analyst at GlobalData, comments: “As Denel records a loss of R1.96bn for the 2019/2020 financial year that continues the trend of annualized deficits in recent years, the company has been embroiled in court proceedings due to its inability to pay the salaries of its employees since April 2020. This has resulted in Denel operating at a reported capacity of only 30% as of February 2021, which has severely affected output as it fails to meet the requirements for a number of contracts. In what would have been an economic lifeline and a significant boost to its export portfolio, the company lost out on a R4.5bn deal with Egypt in 2020 for the delivery of 96 Umkhonto SAM’s due to its failure to secure financial guarantees.

“Denel’s financial woes are not only due to reported financial mismanagement, allegations of which have been under investigation during the ‘state capture’ Commission of Inquiry, but should also be viewed within the wider context of South Africa’s deepening recession – resulting in the country’s downgrade to sovereign ‘junk status’ by Moody’s in 2020 and exacerbated by the impact of the COVID-19 pandemic. The South African defense budget, as a percentage of GDP, has also been shrinking, with domestic orders falling as the majority of Denel orders stem from exports to countries such as the UAE and Malaysia.”

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