(The following statement was released by the rating agency)
July 26 – Fitch Ratings has affirmed the South African
Metropolitan Municipality of Johannesburg’s (CoJ) Long-term local currency
rating at ‘BBB+’, National Long-term rating at ‘AA-(zaf)’ and National
Short-term rating at ‘F1+(zaf)’. The Outlooks on the Long-term ratings are
Stable.
The affirmation reflects CoJ’s continued improvement in its liquidity and
working capital as well as its modestly rising borrowing, which has nonetheless
stabilised financial debt below 50% of revenues and about five years of the
current balance. The ratings also take into account the weak socio-economic
indicators by international standards.
Failure to re-strengthen tax and fee collection rates towards the 95% level of
past years, which may help contain the growth of receivables and payables by
FY15 to about ZAR9bn and ZAR10bn, respectively, could lead to a downgrade.
Conversely an operating margin growing to 15% from the current 11% in a context
of stronger debt sustainability as indicated by a debt to current balance below
five years could lead to an upgrade if macroeconomic conditions, as encapsulated
into the Negative Outlook for the South African Republic, improve.
Budgetary surpluses in FY11 and FY12 drove Johannesburg’s cash reserves towards
ZAR2bn in June 2012, up from ZAR300m in June 2010. Fitch believes that
improvement in the average tax and fee collection rate to around 95% over the
medium term from 90% in FY12 will be conducive to bolstering cash reserves
around ZAR3-4bn, as opposed to the city’s expectations of ZAR6.5bn by 2015.
Stronger liquidity would also help overcome the city’s working balance deficit,
although the level of receivables remains a concern.
Economic growth, which Fitch expects to be about 4% per year over the medium
term, appears too soft to reduce the 25% unemployment rate, far exceeding
international peers. The city may therefore find it challenging to continue
passing ever growing water and energy bills on consumers, and enforcing tax
compliance to improve collection rates. The slowdown in economic growth from
6%-7% in previous years could result in further delays in receipts, raising
receivables, net of provisions, beyond Fitch’s central scenario of about ZAR9bn
by 2015. The city has budgeted for ZAR8.5bn receivables by 2015, up from ZAR6bn
in FY2011 and for a stabilization of trade and other payables at about ZAR8.5bn
over the same horizon.
Fitch’s base case scenario envisages an operating margin stabilising at about
11%-12% over the medium term as the need to expand basic service delivery to the
growing population may pressure operating spending and constrain the margin from
rising towards the 15% budgeted by the city by 2015. However, investment
flexibility should avoid an overshooting of deficit spending as some of the
projects may be deferred.
Part of the investment stems from the need to accommodate the expected impact of
the climatic changes. With Johannesburg becoming more prone to rain and subject
to floods than in the past, early preparations may help spare the city from
totally unanticipated capital spending. As the city prepares its ZAR100bn plan
over the next decade, capital spending will rebound towards ZAR7bn in 2015 from
ZAR3.7bn in 2012, focussing on projects such as electricity, water,
transportation and housing to accommodate its growing population.
Resumption in investment will turn the budget from a small surplus – as per
Fitch’s adjusted data on an international standard basis – to a deficit of about
ZAR1bn or 2%-3% of revenues around FY15, with borrowing limited to about 20% of
annual investments.
Continued…
