* Denel has faced liquidity crisis

* Cornerstone of local defence industry

* Says needs support for strategic role

* PIC rolls over 2.5 bln rand of Denel bonds (Adds detail, context)

JOHANNESBURG, Oct 21 (Reuters) – South African state arms firm Denel said on Wednesday it faced a funding gap of around 2.75 billion rand ($168 million) over the next five years for key capabilities such as ammunition production and aircraft maintenance.

Denel, which makes military equipment for South Africa’s armed forces and export, has long been in the throes of a liquidity crisis which has been aggravated by the COVID-19 pandemic.

It is one of a handful of struggling state companies the government has been keeping afloat with bailouts.

Interim Chief Executive Talib Sadik told a parliamentary committee that Denel had asked the defence ministry to provide 683 million rand in the current 2020/21 financial year to cover the funding gap for “sovereign and strategic capabilities,” which if lost could threaten South Africa’s ability to defend itself.

A presentation to the committee showed funding gaps of 635 million rand, 600 million rand, 431 million rand and 400 million rand in the subsequent four years for sovereign and strategic capabilities, which also include things like missiles.

The request for defence ministry support this financial year is on top of the 3.8 billion rand that Denel is seeking from the National Treasury over 2021/22 to 2023/24.

Sadik said on Wednesday that Denel was taking steps to cut costs, reduce debts and dispose of non-core assets.

But he said difficulties paying full salaries this year had led some important technical staff to leave.

Denel’s presentation showed it owed 391 million rand in unpaid salaries and statutory obligations like payments to its employee pension fund.

State asset manager the Public Investment Corporation recently rolled over 2.5 billion rand of Denel bonds for a further 12 months, and the government disbursed more bailout cash to help Denel repay debt, the presentation also showed.

On top of that Denel is due to receive a further 271 million rand from the government this financial year.