GCR Ratings, an affiliate of Moody’s Investors Service, has downgraded the City of Johannesburg’s credit rating and revised its outlook from stable to negative, highlighting cash flow challenges in SA’s economic and financial hub.
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”.
This means that the city’s ability to pay back its loans has been weakened, and the elevated risk will also contribute to the higher cost of borrowing for the cash-strapped metro.
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”.
Investec chief economist Brian Kantor said the downgrade means the metro’s “ability to pay back its loans is being compromised. The [city’s] collections have deteriorated. The metro is on a downward path unless it can improve its operations, deliver better services and fill the potholes. The roads in the inner city have collapsed. The city is in big trouble, and you can’t borrow your way out of it.”
The City of Joburg, SA’s richest metro with a budget of R80.9bn for 2023/24, has been dogged by cash flow challenges, which spurred its finance head Dada Morero to call on the private sector to help address the city’s socioeconomic crises.
The city, which contributes almost 20% to GDP and about 40% to Gauteng’s economy, has high joblessness, violent crime, poverty and inequality. Its revenue collection fell 86% in October, translating into more than R500m of undercollection.
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.
The Joburg metro’s R80.9bn budget is not enough to address service delivery challenges as it needs at least of R4.3bn a month to meet the service delivery needs of its 6-million residents.
The metro has said some residents could not pay their municipal rates and taxes due to job losses. Businesses owed the city about R7.4bn, and the collection of revenue in township areas is low.
In his budget speech in June, Morero said property rates, the city’s second-largest source of revenue, will increase 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.
Joburg executive mayor Kabelo Gwamanda said in his state of the city address in June that when the governing coalition took over from a DA-led coalition this year “we found a near-bankrupt government sitting with over R6bn in unpaid supplier invoices”.
Under the new political leadership, the metro approved a R2bn loan from the Development Bank of Southern Africa to be used for operations, including its R900m monthly salary bill.
Johannesburg was among five municipalities downgraded by Moody’s Investors Service 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.
Morero has said that of the total R80.9bn budget for 2023/24, R73.3bn is for operational expenditure and R7.6bn for capital expenditure, “with a three-year capital budget of R24.4bn”. The city’s expenditure has been rising in recent years, with a budget allocation of R68.1bn for 2020/21, R73.3bn for 2021/22, and R77.3bn for 2022/23.
Only 38 of SA’s 257 municipalities received a clean audit from the auditor-general on the local government outcomes for 2021/22. The municipalities racked up R4.74bn in fruitless and wasteful expenditure during the period under review.
Update: July 31 2023
This article has been updated with new information.
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