Moody's Investors Service has today downgraded the City of Tshwane's long and short-term issuer rating (South African national scale) to A2.za and P-2.za, respectively, from A1.za and P-1.za, following a significant increase in the city's debt levels. The outlook on the ratings remains negative.
The decision to downgrade Tshwane's ratings follows the significant increase in the city's debt levels to fund its ZAR13.2 billion capital expenditure programme for the period 2013-15. The programme is responsible for growth in the city's debt stock to ZAR8 billion in fiscal year (FY)2013, equivalent to 41% of the city's operating revenue for the year. This is a significant rise from the 35% recorded in FY2012 and is substantially higher than the 27% median of South African metropolitan cities rated by Moody's in FY2013. Going forward, the city expects to incur approximately ZAR1.5 billion new debt per year during 2014-16, which will result in a stabilisation of its debt-to-operating revenue ratio at around 40%.
The costs associated with the city's capital expenditure programme has impacted negatively on the city's cash flows. Net cash flow from operating and investing activities deficit widened further to ZAR1.3 billion in FY2013, from ZAR0.7 billion in FY2012. The city utilised its credit lines with various banks. The city's projections for the fiscal year ending 30 June 2014, nonetheless, indicate cash holdings remaining flat at around ZAR1.5 billion.
The large capital spending has added to the expenditure pressures that Tshwane is facing from the incorporation of two adjacent local municipalities with relatively weak fiscal capacity. Growing costs for service delivery were responsible for the 36% increase in operating costs in FY2013 compared to FY2011, which outpaced revenue growth in the same period. Notwithstanding these pressures, Tshwane's ratings remain supported by its large and diversified economic base, which also reflects the city's status as the administrative capital of South Africa.
The negative outlook on Tshwane's rating reflects Moody's expectations of continued cash flow pressures and the fiscal challenges associated with high and growing debt levels. It also mirrors the negative outlook on South Africa's sovereign rating.
