Joburg ‘financially resilient’ despite downgrade, says Morero
Cash-flow challenges and increased debtors have resulted in a credit-rating downgrade for SA’s financial and economic hub
Johannesburg finance head Dada Morero has blamed slow economic growth, persistent load-shedding and an increasing population for the metro’s credit-rating downgrade, saying these factors resulted in residents and property owners struggling to pay for municipal services.
This after GCR Ratings, an affiliate of Moody’s, informed bondholders this week it had downgraded Joburg’s credit rating and revised its outlook from stable to negative, highlighting cash-flow challenges plaguing the country’s economic and financial hub.
This means that the city’s ability to repay its loans has been weakened, and the elevated risk will also contribute to the higher cost of borrowing for the cash-strapped metro.
Morero said with the contraction in the economy, increasing joblessness and declined household revenues, “customers are struggling to honour their debts owed to the city, resulting in a growing debtors’ book”.
The city, which contributes almost 20% to GDP and about 40% to Gauteng’s economy, is besieged by high joblessness, violent crime, poverty and inequality. Its revenue collection fell 86% in October, translating into more than R500m of under collection.
“An ever-increasing migration into [Joahnnesburg], with thousands of people searching for opportunity, is also putting strain on the city,” he said.
“Despite these macroeconomic challenges, the city has remained focused on continuously strengthening its financial position, while actively pursuing the achievement of its service delivery goals.”
The metro, which has a budget of R80.9bn for 2023/24, has “consistently demonstrated its financial resilience as evidenced by the generation of recurring surpluses, maintenance of adequate cash balances, maintenance of stable debt ratios and the continued roll out of the capital expenditure programme”.
Despite ... macroeconomic challenges, the city has remained focused on continuously strengthening its financial position, while actively pursuing the achievement of its service-delivery goals.Dada Morero
Morero said the municipality, which needs at least of R4.3bn a month to meet the service delivery needs of its 6-million residents, has honoured all its “debt liabilities and will continue to do so. All of this has been achieved within the context of a deteriorating global economic environment”.
The metro’s national scale long-term issuer rating was downgraded to A (za) from A+ (za), with the short-term issuer rating affirmed at A1 (za), due to continuing pressures on operating performance as evidenced in “subdued income growth, increasing expenditures and relatively weak collection rates”.
Morero said: “According to the GCR Rating Framework, a shift from A+ to A does not change the fact that the city is still viewed as high credit quality relative to other issuers or obligations in the same country and in the short term, the city is still viewed as having high likelihood of timely payment of short-term obligations relative to other issuers or obligation in the same country. Access to funding will not be severely affected.”
The ratings agency said the municipality’s income constraints have translated into deteriorating credit protection metrics and tighter liquidity. “This continues to restrict the ratings, notwithstanding the city’s position as the economic centre of SA.” A return to a stable outlook, in the shorter term, depends on the city’s ability to “stabilise its operating performance and liquidity reserves”.
Morero said some of the achievements were that in 2021/22 the city had a surplus of R1.167bn, a positive cash balance of R3.8bn and it spent R6.5bn (88%) of the approved capital budget of R7.4bn (adjusted).
“We experienced a progressive increase in the city’s property, plant and equipment (PP&E) to R81bn. In the year under review, the city achieved a revenue-collection rate of 88.4% against a target of 90.5%,” the finance MMC said.
“We have noted all the issues [that] have been raised by the credit [ratings] agency and are working to strengthen our credit control actions, which will ensure that we increase our revenue collection.”
In his budget speech in June, Morero said property rates, the city’s second-largest source of revenue, will increase by 2%. The electricity tariff will rise 14.97%, while water and sanitation tariffs will increase by 9.3%. The refuse tariff will be 7% higher.
“The projected revenue for electricity increases by 18.5% to R23.5bn. The increase is largely a result of the 14.97% pass through cost from Eskom as well as the strategic drive to reduce total electricity losses to a level of 23% in the new year,” said Morero.
The finance MMC said the city has adopted a financial plan centred on managing the composition of the metro’s expenditure, implementing strategies to achieve effective revenue management, improving on operational efficiencies, ensuring a well-structured and sustainable balance sheet, and “instituting effective internal control measures”.
“The city’s ability to service debt and manage the risk of default remains very robust as we have not defaulted on any of our obligations. Liquidity management is one of our main focuses during these very tough global economic periods where customers are struggling to pay due to high interest rates coupled with a high unemployment rate,” he said.
Morero added: “We remain committed to strengthening the city’s finances, and to improve the capacity to invest in development of our city. SA is faced with challenging economic times ahead with the prospect of decreased allocations to local government from the national fiscus. Thus, it is imperative for the city to continue to strengthen its financial position and ability to self-fund whilst safeguarding ongoing financial sustainability.”
The National Treasury, in its report on local government revenue expenditure for July 1 2022 to March 31 2023, said metropolitan municipalities were owed R139.3bn on March 31 2023, compared with R114.7bn in the prior year.
Johannesburg accounted for 32.2% of this debt, followed by Ekurhuleni at 22.4%. Tshwane did not provide information on their debtors, the Treasury said.
Johannesburg was among five municipalities downgraded by Moody’s in July 2021 because of weak liquidity challenges. Others were the City of Ekurhuleni, the City of Cape Town, Nelson Mandela Metropolitan Municipality and the City of uMhlathuze.
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