Moody’s upgrades City of Cape Town’s credit rating

Moody’s Investors Service has upgraded Cape Town’s credit rating from stable to positive, highlighting the city’s progress in improving its revenue collection.

It affirmed Cape Town’s Ba3 long-term issuer and senior unsecured debt ratings, which is one notch below SA’s sovereign rating of Ba2, itself two notches below investment grade. 

The credit ratings agency said the city’s proactive approach to tackling revenue collection challenges and controlling expenditure growth demonstrated its strong governance and effective budget management.

“The positive outlook reflects our view that Cape Town’s financial performance could further strengthen over the next 12-18 months, surpassing our baseline forecasts,” the agency said.

Moody’s stated that the city’s initiatives such as the use of prepaid electricity meters from residential properties were expected to further diminish the risks of nonpayment or late payment, which the ratings agency regards as a persistent challenges for SA municipalities.

“In our view, the city’s progress in improving revenue collection should contribute to consolidating its financial performance and mitigate the reliance on debt for its substantial investment programme,” the agency said.

Positive development

City of Cape Town mayor Geordin Hill-Lewis told Business Day on Sunday that the upgrade was a positive development for the city.

“We’ve been actively making the case to ratings agencies for over a year that we shouldn’t be viewed the same as other metros, as our financial health and balance sheet are significantly stronger. Unfortunately, they’ve taken a blanket approach, assuming all SA local governments are in poor financial shape.

“However, our efforts to differentiate ourselves and demonstrate our solid financial standing appear to be paying off, as the ratings agencies are now recognising our efforts. This is an encouraging sign that our investments and hard work are yielding results, putting us on the right path,” Hill-Lewis said.

He hoped the positive rating would help bring down the city’s cost of capital “so that we can borrow slightly more cheaply and be able to do even more.

“At the moment, our key limiting factor is not our ability to raise money. There is a high level of confidence in Cape Town, and the city can raise funds. However, the issue is the cost of capital that needs to be repaid. With interest rates exceeding 12%, repayment becomes a heavy burden. We hope that this positive rating will lead to a reduction in the cost of capital, easing the repayment burden.”

Addressing the city’s infrastructure rollout programme, Hill-Lewis said it was mainly focused on water and sanitation, improving and upgrading infrastructure and installing new infrastructure in poorer communities.

He said it was necessary to prepare the city for the rapid population growth it was experiencing.

Moody’s based its rating on the city’s consistently strong and improving operating and financial performance, which it said demonstrated resilience in its liquidity positions. The city has low debt levels, albeit debt is expected to gradually increase in the medium term. 

Moody’s noted a track record of improved management policies and practices, which should help the city maintain sound financial metrics despite infrastructure spending. The city’s liquidity would help it maintain a moderate debt burden despite a big investment plan of R49bn over five years in infrastructure projects, including water, sanitation, transportation and electricity. 

“Despite the challenges posed by increasing investment needs for better water management and drought risk mitigation, Cape Town’s progress in improving revenue collection should bolster its self-funding capabilities, thereby containing future debt accumulation,” Moody’s said in its statement.

tsobol@businesslive.co.za