Global credit ratings agency Moody’s Investors Service has wielded its ratings axe on the City of Tshwane yet again, slashing the sovereign rating of South Africa’s administrative capital by four notches on Monday in one fell swoop.
Moody’s downgraded the metro’s long-term Global Scale Issuer rating to Caa2 from B1, but in a worrying sign it has also “placed the rating under review for further downgrade”.
The degree of the latest downgrade highlights the drastically deteriorating financial position of the metro, plunging City of Tshwane further into junk status following a previous downgrade decision in April.
The capital city was facing financial troubles even before Covid-19 hit.
While the coronavirus pandemic has significantly exacerbated the metro’s financial woes, political infighting and weak coalitions have not helped matters.
Moody’s says that it has also downgraded the long-term National Scale Issuer Rating (NSR) to Caa1.za from Baa2.za, and placed the long-term NSR under review for further downgrade.
“The four-notch downgrade of Tshwane’s long-term global scale rating reflects the sharp deterioration in the city’s liquidity pointing to a significant risk of default on its financial obligations,” Moody’s notes in its ratings decision.
“Contrary to Moody’s previous expectations, higher financing needs have not been matched by larger financing flows. Rather, the city’s access to external borrowing is highly constrained, as evidenced by its failure to secure new borrowing so far in fiscal 2021,” it adds.
The ratings agency says that its Caa2 rating “reflects Moody’s view that the fiscal and liquidity challenges faced by the city will persist as it continues to struggle to balance its operations in a difficult operating environment in South Africa”.
According to Moody’s estimates, in the absence of a sudden sharp increase in revenue collection, Tshwane will close the 2021 fiscal year in June with a cash deficit of more than R1 billion, which is around 3% of operating revenue.
“Throughout the year, revenue collection has been weaker than expected, largely due to the coronavirus impact on the local economy. This has coincided with a marked increase in expenditure as Tshwane implemented salary increases [+28% increase in salary costs in 2020],” the agency points out.
It says that the city’s deficit position includes forthcoming debt payments, which are due by the end of June 2021.
“The city’s financing options included loans that have not materialised. Instead, the city is likely to rely on its sinking fund, which Moody’s estimates currently stands at R717 million; and potentially run larger arrears with its goods and services suppliers including in the public sector,” Moody’s warns.
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“In any case, the liquidity situation is unlikely to stabilise in the near term … Moody’s expects operating and liquidity pressure to persist in the medium term. The weak operating performance which drives poor revenue collection has been exacerbated by the coronavirus impact and high operating costs,” it says.
Moody’s notes that while the City of Tshwane has recently implemented new measures to improve revenue collection, it will take time to see material improvement in cash flows.
“The salary increase increases the rigidity of the city’s overall expenditure and makes implementing effective spending cuts more challenging.
“Liquidity buffers are highly unlikely to be rebuilt, the debt burden is likely to increase from 40.8% of revenue in the 2021 fiscal year, and debt service will remain very challenging,” the agency adds.
Following further deterioration in the city’s fiscal performance and liquidity, Moody’s says that it has also downgraded the baseline credit assessment to Caa2 from B1.
“The City of Tshwane’s final rating of Caa2 incorporates Moody’s assessment of a low likelihood of support from the South African government [Ba2 negative]. Moody’s also downgraded the long-term national scale issuer rating to Caa1.za from Baa2.za reflecting the city’s weaker credit profile relative to other rated peers in the country.”
The ratings agency says that a rating upgrade for the city is unlikely, considering the rating under review for further downgrade.
However, Moody’s adds that it could consider confirming the ratings if the city implements restorative measures or receives financial support.