In an unsurprising move, Moody’s has downgraded the credit of a number of municipalities deeper into junk status, including Johannesburg, Ekurhuleni and its water entity Water Care, Cape Town, Nelson Mandela Bay and uMhlathuzi, which includes Richards Bay.
“For quite some time, the sovereign’s credit rating has been on a downward trajectory and with it all entities that derive their credit rating from government support. As the sovereign balance sheet has weakened, its ability to lend support to related entities has dwindled, as was demonstrated in the case of the Land Bank and SAA,” says Mokgatla Madisha, head of fixed interest at Sanlam Investments.
When the credit quality of a municipality is assessed, socio-economic factors such as unemployment are included and Madisha says unemployment is an indicator of the potential financial burden on a municipality.
“The higher the number of the unemployed, the greater the demand for free services to the poor, or the greater the possibility of non-payment for services provided due to the financial limitation of poor households.”
However, Madisha says the impact of the downgrades in and of themselves will be limited, as Cape Town and Johannesburg are still highly rated on the national scale.
“Ekurhuleni’s rating is more problematic as it now finds itself just one notch away from sub-investment grade on the local rating scale.”
He points out that the bigger problem for municipalities is that pension funds and insurers have largely stayed away from financing the sector.
“The Municipal Borrowing Bulletin of March 2021 shows that their exposure to the sector peaked at around R10 billion in 2011 and has steadily declined since.”
Financing to the sector has actually grown at a paltry 4.5% over the past ten years, which constitutes zero real growth.
The auditor-general office warned in its 2019/20 that local government finances continue to be under severe pressure due to nonpayment, poor budgeting and ineffective financial management.
It said the financial position of just over a quarter of municipalities was so dire that there was significant doubt that they would be able to continue operating as a going concern in the near future.
In addition, there has been no action against officials guilty of bad governance and mismanagement of funds. These are the real reasons why municipalities struggle to raise finance for much-needed infrastructure, Madisha said.
He said Sanlam was most worried about the City of Tshwane, which was downgraded by Moody’s in June, because a default by a major municipality could further sour sentiment in the investor community.
“Investors have not lost money lending to one of the metros or municipalities and that is because none of the bigger metros have defaulted so far and Section 139 (1)(C) of the Constitution gives the provincial government power to dissolve council and to appoint an administrator to run the affairs of a failing municipality.”
The ANC caucus in the City of Cape Town says it is not surprised by the city’s downgrade, saying it has raised concerns on numerous occasions about “the glossy financial reports” given to the council that paint a very good financial position of the city.
“It has now become clear that these reports were nothing but a cover up for poor financial management. This is a contradiction of the gloomy financial report on debt collection, when over R4 billion of debt is going to be written off.”
The caucus called it “an ill-conceived electioneering mechanism” from the DA designed to woo voters in the upcoming local government elections.