As Cape Town’s dam levels fall, the city may see borrowing costs rising.
The water crisis afflicting Africa’s top tourist destination is credit-negative as it will reduce revenue at a time when the city has to boost spending to ensure supplies, Moody’s Investors Service said in a report on Monday. The report doesn’t constitute a rating action, said Moody’s, which has an investment-level rating on Cape Town’s bonds.
Municipal water revenue contributed about 10% of Cape Town’s operating income in 2017, a proportion that is set to dwindle as the city restricts water usage. At the same time, spending on crisis management and water supply projects will increase, Moody’s Associate Analyst Daniel Mazibuko said in the report. Two main industries — tourism and agriculture — will feel the effect, leading to lower employment and tax income, he said.
“Other effects include threats to public health from poor sanitation and, more generally, to social order, which is significant given Cape Town’s marked income inequality,” Mazibuko wrote. “If the crisis persists, it remains to be seen how the city will cope with the unfolding crisis’ potentially wide-ranging consequences on the city’s finances and economy.”
Cape Town is in the throes of the worst drought on record, and water levels in its six main supply dams have plummeted to an average of 26.3%, from more than 90% four years ago. With the winter rainy season still about four months away, residents may find themselves lining up for a daily allocation of 25 liters (6.6 gallons) each from April 12 unless water usage declines sharply.
The city last accessed the bond market in July, when it sold R1 billion ($84 million) of sinkable securities maturing in 2027. It has a total of R5.2 billion outstanding in four bonds, according to data compiled by Bloomberg. Moody’s rates the debt Baa3, the lowest investment level and on par with South Africa’s sovereign rating.
Cape Town’s policy of maintaining a strong liquidity ratio and conservative debt management, with a debt burden of only 11% of operating revenue, will help mitigate the effects of borrowing required to implement capital projects over the next three years, Mazibuko said.
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