Moody's on Wednesday downgraded Mangaung Metropolitan Municipality, located in the Free State, to one of the lowest ratings on its scale.
The rating moved down three notches from Ba3 – which meant the municipality was still likely to fulfill its obligations – to B3, which means there is now a high risk it cannot meet its obligations. Both levels are at junk status. Moody's also assigned a negative outlook to the municipality as there is uncertainty that Mangaung will succeed in improving its financial performance and liquidity profile over the next year and a half.
Moody's had first started its review on the municipality on May 2, 2019, the ratings action is the conclusion of that process.
In its rating action announcement, Moody's said the downgrade reflects the municipality's "weak and declining" liquidity position, which has led to it failing to service commercial bank debt on time - "implying a relatively high probability of default in future," the report read.
Manguang's net cash declined from R289m, reported in 2018, to R131m reported in the 2019 preliminary results. The municipality had to request a delay in honoring some of its financial obligations.
"The continuous decline in the city's cash and cash equivalents balances is a result of poor collection rates from consumer debtors. Despite the drive by the city through their financial recovery plan to collect revenue, their consumer debtors increased to R2.8bn according to the 2019 preliminary result 2019 from R1.3bn in 2018," the report read.
"The liquidity pressures reflect a combination of weak local governance, which exacerbates collection issues, and poor effectiveness of the recovery plan with the central government.
"The extent of the downgrade reflects Moody's prior expectation that there would be more effective measures and communication between Mangaung and the central government both to address collection problems and to provide any additional support necessary, which did not materialise," Moody's said.
Financial recovery plan
Moody's noted that a financial recovery plan developed by the municipality with central government in July 2018 has not been successful in improving its liquidity position. Only R192m of old debt has been collected from government departments from July 2018 to May 2019.
As of June 30, 2019, the metro was owed a total of R4.1bn, of this 36% was owed by business and government, while 64% was from residential and other debtors, Moody's said.
The municipality has not yet implemented changes recommended by the National Treasury for its 2019 budget, this will likely result in an under-funded budget for the 2019/20 financial year, Moody's highlighted. The ratings agency will continue to monitor the implementation of the financial recovery plan.
"Improved revenue collection from old debtors, and in particular debt owed by national and provincial government, as well as from businesses, could lead to the rating being stabilised," Moody's said.
However if the liquidity position worsens further, Moody's would consider further downgrades.
The Democratic Alliance has issued a statement on the ratings agency's decision, calling it a "devastating blow".
On Thursday, the opposition party will hold a press briefing on its plans to take action in the ANC-led municipality.
"This credit rating downgrade will undoubtedly turn away what investment the Metro may have attracted, constricting the local economy and jobs," DA Councillor Hardie Viviers said.