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Pretoria – The City of Tshwane’s weaker revenue collection, and more than 28% salary increases in 2020, were among the reasons cited by the rating agency Moody’s Investors Service for downgrading the metro’s credit status this week.
The rating agency downgraded the City’s credit rating status from B1 to Caa2 with a worrying forecast that the municipality could end 2021 with a more than R1 billion deficit.
Moody’s also downgraded the long-term national scale issuer rating to Caa1.za from Baa2.za; placed the long-term rating under review for further downgrade.
The short-term national scale issuer rating has been downgraded to NP.za from P-2.za, with the short-term global scale issuer rating of NP being affirmed.
Moody’s said: “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.”
Compounding the City’s poor financial standing, the rating agency announced that it placed the rating under review for further downgrade depending on whether the City’s restorative measures would yield positive fruits.
One of the restorative measures announced in March by the City was a drive to recoup R17bn from defaulting customers.
The latest development followed another downgrade in April when the City’s credit status was downgraded to the metro’s long-term global scale issuer rating to B1 from Ba3 and maintained the negative outlook.
In May, Tshwane mayor Randall Williams announced that the metro was bankrupt, with its liability exceeding its assets value of R11bn by R3bn.
Williams had also expressed concerns about the growing debtors’ book, saying it increased during the period when the departed administrators, appointed by the ANC-led Gauteng provincial government, were in charge of the City.
Regarding its decision to place the City’s rating under review for further downgrade, Moody’s said it was due to “significant negative pressure on liquidity and uncertainty on how the City will be able to cover its large cash shortfall in fiscal 2021, raising the prospect of a default on its financial obligations in the immediate term and/or later”.
The rating agency pointed out that “the City’s access to external borrowing is highly constrained, as evidenced by its failure to secure new borrowing so far in fiscal 2021”.
Moody’s predicted that “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 R1bn, around 3% of operating revenue”.
Moody’s report further noted that the City’s revenue collection “has been weaker than expected throughout the year 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 deficit position includes forthcoming debt payments due by the end of June 2021,” the rating agency said.
It further said the City’s financing options included loans that had 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.”
While the rating agency noted efforts to improve revenue collection, it mentioned that measures would “take time to see material improvement in cash flows”.
Good party spokesperson Sam Shabane said the further downgrade of the City of Tshwane – the second in three months – was a bugle call for urgent and drastic intervention.