Cities on the cliff: Moody's downgrades SA metros to junk status

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The downgraded metros are the City of Ekurhuleni, the City of Cape Town, Nelson Mandela Metropolitan Municipality and the City of Johannesburg.
The downgraded metros are the City of Ekurhuleni, the City of Cape Town, Nelson Mandela Metropolitan Municipality and the City of Johannesburg.
  • The downgraded metros are the City of Ekurhuleni, the City of Cape Town, Nelson Mandela Metropolitan Municipality and the City of Johannesburg.
  • Ekurhuleni Water Care and the City of uMhlathuze, which includes Richards Bay were also included.
  • This comes after Moody's downgraded the Tshwane Metropolitan Municipality in June citing liquidity concerns at one of South Africa's richest municipalities.

Sovereign credit ratings agency Moody's downgraded South African metropolitan municipalities on Friday citing uncertainty in the strength of their revenue collection and increasing financial pressures.

The downgraded metros are the City of Ekurhuleni, the City of Cape Town, the Nelson Mandela Metropolitan Municipality and the City of Johannesburg.

Ekurhuleni Water Care and the City of uMhlathuze, which is a local municipality that includes Richards Bay, were also included.

This comes after Moody's downgraded the Tshwane Metropolitan Municipality in June citing liquidity concerns at one of South Africa's richest municipalities.

As the local government elections draw closer and the finances of South Africa's 257 municipalities are expected to come under keen focus.

The Auditor General Tsakani Maluleke reported earlier this month that the combined irregular expenditure of all municipalities over the past year amounted to R26 billion.

In the latest report Moody's said rating downgrades reflect rising liquidity pressure "as a result of material shortfalls in revenue collection" in the context of very weak growth.

"In this environment, the reviews for further downgrade reflect high uncertainty about the RLGs (regional and local governments) capacity to secure financing well in advance of debt and other payments being due," the report said.

Moody's said these South African metros were likely to draw down on cash buffers which will heighten the risk that their capacity to absorb future shocks will be eroded.

Moody's said the decision to downgrade the ratings of the municipalities by one notch reflects the rising liquidity pressures and shortfalls in revenue collection, that Moody's expects to last as a result of lackluster growth.

"On average rated municipalities generate more than 80% of their operating revenues from fees for services provision. Based on currently available information, very weak growth is likely to result in a more marked decline in their collection rate than Moody's previously expected," the agency said.

Moody's observed that some municipalities reported declines of up to 10% in revenue collection during 2020, which the agency said is likely to be widespread and persistent.

"As a result, Moody's expects a material deterioration of gross operating balances and cash balances in the 2021 financial year and the 2022 financial year," the report said.

Moody's expects the metros will continue struggling to balance operations in the coming years, potential cuts in capital expenditure and an already significant infrastructure backlog, which will be credit negative.

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