City of Cape Town downgraded to junk status by rating agency
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Cape Town - Credit rating agency Moody's downgraded South African urban municipalities to junk status on Friday, citing uncertainties about the quality of their revenue collection and mounting financial challenges.
The City of Cape Town is among the three municipalities downgraded to junk status, which include the Nelson Mandela Metropolitan Municipality and the City of Johannesburg.
In their report, Moody’s said the downgrade was due to liquidity pressure as a result of material shortfalls in revenue collection and weak growth.
“In this environment, the reviews for further downgrade reflect high uncertainty about the RLG’s (regional and local governments) capacity to secure financing well in advance of debt and other payments being due,” reads the report.
The rating may come as a surprise to many as the same rating agency just last month acknowledged that the City consistently reflects prudent and strong financial performance with a stronger liquidity position than that of its peers in South Africa.
Moody’s further acknowledged in that report that the City’s overall financial performance also remains stronger than that of rated peers in South Africa. In the latest report the agency said that 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 more marked decline in their collection rate than Moody’s previously expected,” said the agency.
Deputy mayor and mayco member for finance Ian Neilson said they were waiting for further clarity from Moody’s on the City’s downgrade being in contradiction to what was stated a month ago by Moody’s.
“The City of Cape Town has written to the rating agency Moody’s to clarify the outcome from a ratings report that has included the City in a general municipal governments’ downgrade due to the weak collection ratios of local government in general.
“The City is however of the opinion that its cash flows are resilient with a collection rate of 98,9% – a rate that is unprecedented among South African municipalities. This is in fact one of the reasons that Moody’s in a recent report on 10 June 2021 stated it was maintaining the City’s credit rating because of the metro’s ‘strong financial performance, supported by prudent financial management’.”
He added that the City’s cash position also remains positive to meet its ongoing creditors’ obligation and other future obligations such as bond repayments.
“In addition, the City’s cash liquidity is sufficient to continue the roll-out of the City’s 2021/22 capital programme. The working capital is currently equal to approximately 1.9 months of expenditure. The National Treasury guidelines are that municipalities should have working capital of between one and three months of expenditure, which is within this norm and considered appropriate at this time.”
Sandra Dickson from lobby group Stop CoCT said: “The City seem to have fallen victim to its own conflicting messages it sends out regarding the ’healthy debt collection rate of 98.9’ as quoted in their media release. At the same time, the City also says that it is writing off R4 billion in bad debt. Which of these is the lie?
“In the Credit Rating Opinion by Moody’s on 10 June 2021, it states that the City borrowed R1.1bn in the 2020 financial year. The report further says that the city plans to borrow R2.5bn in fiscal 2022 and a further R4.5bn in fiscal 2023. As result, the City's net direct debt will increase to R8.9bn by fiscal 2023, with net direct and indirect debt as a percentage of operating revenue rising to 18%. The report goes on to say that the liquidity of the City is good. Again a contradiction. Why make these borrowings in the light of this positive liquidity status?
“It appears that Moody's is seeing what Stop CoCT sees. The City is incoherent with the way it portrays its financial status to the public.”