Cities hit by Moody’s ratings downgrades
• Agency cites increased stresses on revenue collection
Moody’s Investors Service on Friday downgraded five SA cities, placing them deep into junk territory at a time when municipal finances are extremely stretched. They are Johannesburg, Cape Town, Ekurhuleni, Nelson Mandela Bay and uMhlathuze. The Ekurhuleni Water Care Company was also downgraded.
Moody’s Investors Service on Friday downgraded five SA cities, placing them deep into junk territory at a time when municipal finances are extremely stretched.
The larger SA cities raise money on the bond market, though not in large amounts, and the downgrade will affect their cost of borrowing in both bond and capital markets.
Included in the rating action were Johannesburg, Cape Town, Ekurhuleni, Nelson Mandela Bay and uMhlathuze. The Ekurhuleni Water Care Company was also downgraded.
Moody’s said the action was a result of increased financial stresses on revenue collection, due to the Covid-19 pandemic and low growth. The low revenue collection was expected to continue, it said.
“The rating downgrades reflect rising liquidity pressure as a result of material shortfalls in revenue collection, that Moody’s expects to last, in the context of weak growth. SA regional and local governments are likely to draw down on cash buffers, with different starting positions, eroding their capacity to absorb future shocks,” it said.
All the entities were downgraded one notch and also placed on review for further downgrade, a reflection of “high uncertainty about regional and local government’s capacity to secure financing well in advance of debt and other payments being due”.
All SA cities are now well into junk territory. The metros of Cape Town, Johannesburg and Nelson Mandela Bay are one notch below the country’s sovereign rating, three notches into junk on the Moody’s scale. Ekurhuleni and uMhlathuze, which includes Richards Bay, are now five notches into junk.
The metros of Tshwane and Mangaung, which were previously downgraded, are the worst performers, with Tshwane eight notches below investment grade and Mangaung seven.
Deputy mayor of Cape Town Ian Neilson said the city was aggrieved at the action as the city was financially healthy and had asked for further information from Moody’s.
“We have questioned what they based it on. We know 60% of the rating is based on the sovereign rating, but to say we have a problem with payments is incorrect. We achieved 98% payment rate this year and we are still sitting on R17bn in the bank, which is earmarked for expenditure. So we are peeved we have not been judged on our own merits,” said Neilson.
Sinovuyo Mpakama, the city of Johannesburg head of treasury, said the city was also aggrieved at the downgrade and felt its financial position had not been properly evaluated.
“The ratings agency applied a blanket approach for all municipalities. The city has engaged the ratings agency in this regard, and they have indicated that they will be coming back at a later stage for an in-depth assessment, which the city will await,” he said.
Despite the Covid-19 pandemic, the city had achieved a 90% payment rate, which is above the target penned down. Joburg had closed the financial year at the end of June with cash balances of R5.9bn, a vast improvement on the previous financial year, when cash stood at R400m.
Specialist in city finance Roland Hunter said the ratings did not come as a surprise as municipalities had experienced cash flow difficulties due to the Covid-19 crisis.
“It’s not a surprise in the context of Covid-19 and low growth. Cash inflows have been inadequate and this is going to put pressure on their spending, including borrowing. Municipalities need a cash surplus to repay and this is what Moody’s is indicating,” said Hunter.
THE DOWNGRADES REFLECT RISING LIQUIDITY PRESSURE AS A RESULT OF SHORTFALLS IN REVENUE COLLECTION