The decision by the cash-strapped City of Tshwane to hike workers’ salaries by 6.25% in 2020 is among the factors that led to Moody’s Investors Service downgrading the metro’s credit ratings again this week.
The ratings agency downgraded the metro’s long-term global scale issuer rating to B1 from Ba3 and maintained the negative outlook. It also downgraded the city’s long-term national scale issuer rating by five notches to Baa2.za from Aa3.za, which is three notches above the country’s sovereign rating of Ba2.
The Aa3.za rating is considered high quality, subject to low credit risk, while Baa2.za is regarded as medium grade, “subject to moderate credit risk and may possess certain speculative characteristics”, according to Moody’s rating scale.
Ratings agencies are crucial in the global economy as they allow investors to assess the ability of companies or governments to pay back their money before lending to them. A speculative rating is regarded as high risk and makes it expensive for governments or companies to borrow money.
Moody’s said the downgrade reflects the City of Tshwane’s “negative operating results in the 2020 financial year, likely to persist in the medium to long term, and its weak liquidity position, heightening the municipality’s vulnerability to shocks including the coronavirus pandemic”.
It said the significant decline in operating performance in 2020 was driven by the low demand in service charges “worsened by the coronavirus pandemic leading to flat operating revenues.
“At the same time, operating expenditure grew by 16% according to the 2020 unaudited financial statements, reflecting a significant increase in salary costs and higher bad debt provisions,” Moody’s stated on Wednesday.
“In our view, the substantial salary adjustments in 2020, which followed protests from municipal employees, underscore some weaknesses in the city’s budget planning, in particular the lack of management response in phasing these additional costs in the past three years.”
Members of the SA Municipal Workers’ Union (Samwu) embarked on protests in July 2020, demanding that the municipality implement the last leg of a multi-term agreement signed at the SA Local Government Bargaining Council in 2018.
At the time the metro’s erstwhile chief administrator Mpho Nawa told Business Day that implementing the wage increase will have huge financial implications for the metro.
He stressed that the metro’s revenue collection had been negatively affected by the strict national lockdown implemented by the government to help contain Covid-19.
Most businesses were forced to shut during the lockdown, and some have failed to reopen. Nawa emphasised that “the city is broke because revenue has declined” and lashed out at the union members for demanding wage increases.
Moody’s said the capital city’s cash and cash equivalent, including short-term investment, declined from R2.2bn in June 2020 to R1.1bn in February 2021. It said the liquidity pressure has prompted the city to draw from its sinking funds investment.
“These funds are invested for the repayment of R2.2bn bonds of which 65% will be maturing in April 2023 and the balance is due in 2028. As at April 13 2021, the sinking fund balance was R341m, down from R969m in February 2021,” the ratings agency said.
“While the municipality plans to rebuild its reserves going forward, Moody’s believes that liquidity pressures will persist for some time reflecting persistently weak revenue collection and significant spending pressure.”
DA Tshwane MMC for finance Mare-Lise Fourie said the downgrade was disappointing and further proof of the impact and contribution to the “financial ruin of the city by the irregularly appointed ANC administrators during 2020”.
“Though the latest rating still includes the city in the investment grade category, the downgrade will impact negatively on the city’s ability to access long-term capital funds for infrastructure improvements, particularly to disadvantaged communities. It will also increase the cost of capital,” Fourie told Business Day on Thursday.
Stanlib chief economist Kevin Lings said most municipalities in SA were under increased financial pressure due to Covid-19.
“In the past 12 months municipalities have struggled to collect revenue that they normally would. Obviously a lot of that relates to Covid-19 and people being unemployed. The situation could improve as the economy opens us.”
Lings said another related issue was that municipalities were struggling to pay their suppliers.
“What this means is that financial risk in municipalities has increased significantly and financial systems will be wary of municipalities and the risk of them not being able to service their debts,” he said.
“The ratings agencies are reflecting that risks have gone up. Those risks can get better if the economy picks up, growth picks up, employment picks up, and the Covid-19 vaccine is rolled out. The solution is meaningful growth that creates jobs.”
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