Moody’s Investor Service has sent the rating of Ekurhuleni further into junk territory and placed Tshwane’s on review for a downgrade for failure to submit its audited financial statements, giving two of the country’s biggest cities a harsh lesson in fiscal discipline.
The ratings agency downgraded Ekurhuleni’s long-term issuer (domestic), senior unsecured ratings to Caa2, three notches below the highest junk status in a reflection of a very high credit risk. Moody’s also put the City of Tshwane long-term issuer of Caa2, and its national scale rating of Caa1.za on review for further cuts.
The credit ratings agency said the delay in filing the financial reports increased the risk of suspension and delisting of the bonds issued by the two cities, which may trigger bondholders to demand immediate repayment of the debt and activate cross-default clauses on other borrowing obligations.
“Although the timing of a potential suspension and the subsequent delisting of the notes is uncertain, in Moody’s view the failure of the two cities to submit their audited financial statements has increased the risk of a debt acceleration should a delisting occur and of potential defaults ultimately, given their weak liquidity position,” Moody’s said in a statement on Wednesday.
Both cities, which missed the February 29, 2024, deadline to submit financial statements, are likely to have begun talks with the JSE to hold off on suspending their debt on promises to issue their earnings reports by the end of this month.
“Notwithstanding these statements, the outcome of this dialogue is uncertain,” Moody’s said.
Moody’s action is a blow to the two cities, which are home to some of the country’s key industries such as manufacturing, mining, tourism and Africa’s busiest airport, OR Tambo International.
They have been struggling to collect revenues from consumers amid power cuts, and water shortages while facing rising costs and liabilities. Moody’s said they had low operating balances, low cash coverage of liabilities and low capital expenditure rations, which raised concerns about their ability to meet their immediate and long-term financial commitments.
Moody’s actions come as the cities suffer from instability and chaos caused by coalition politics since the 2021 municipal elections. Both cities have been governed by fragile and shifting coalitions, hampering service delivery, governance, accountability and eroding public trust in the local governments.
The ratings could be confirmed at current levels if the two cities successfully submit their financial statements and avoid a delisting, and if there was no material weakening in their financial and debt metrics, Moody’s said.
But Moody’s would also assess whether the failure to meet the submission deadline — seven months after the end of the fiscal year — reflected weaker governance than now embedded in the ratings.
The metros’ financial woes are the latest headache for finance minister Enoch Godongwana, whose ability to provide support is limited by the national government’s own fiscal challenges and the low likelihood of recovering the funds.
The government has also been trying to improve governance and financial management of local governments, through interventions, audits and oversight. Still, the effectiveness of such measures is called into question by poor performance, mismanagement, fraud and irregularities.
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