Actions follow the weakening of the South African government's credit profile
Moody's Investors Service has today changed the outlook on 10 South African regional and local governments' (RLGs) and two government-related entities' (GRIs) ratings to negative from stable. Moody's has affirmed the ratings of all the affected issuers. A list of the affected ratings is at the end of this press release.
The outlooks on South African National Roads Agency (SANRAL) and Mbombela local municipality remain negative.
RATINGS RATIONALE
RATIONALE FOR ASSIGNING A NEGATIVE OUTLOOK TO 10 RLGS AND TWO GRIS
The outlook change to negative from stable on the ratings of 10 regional and local governments and two government-related issuers reflects the close operational and financial linkages between the national government and municipalities, illustrating the centralised nature of the local public sector. Large cities are exposed to the country's macroeconomic performance and socio-economic conditions to varying degrees, while small- to medium-sized municipalities are highly reliant on government transfers for operations and capital investments.
While metropolitan cities rated by Moody's display comparatively rich economic bases, sound financials and good governance practices, Moody's expects that the weaker-than-anticipated economic growth prospects in the medium-term will put pressure on their overall financial performances.
The rating agency also anticipates that these large cities -- which together account for well over 25% of the country's population -- will continue to register high demand for welfare benefits and infrastructure. In addition, they feature moderate-to-high debt levels, which add rigidity to their budgets.
Similar to metropolitan cities, local municipalities are exposed to the country's deteriorating economic environment through lower revenue growth, but are also highly exposed to government transfers allocations. Moreover, volatile budget results, resulting from less sophisticated budget planning, are a major factor behind most of the ratings being lower than those of metropolitan cities.
Changes to the outlook of East Rand Water Care Company (ERWAT) and City Power Johannesburg to negative from stable mirror changes of their respective parent municipalities, the City of Ekurhuleni and the City of Johannesburg.
South African National Roads Agency (SANRAL) and Mbombela local municipality are unaffected as they already carried a negative outlook. Mbombela's negative outlook reflects the municipality's prolonged weak liquidity profile and volatile operating balances. SANRAL's negative outlook is largely influenced by ongoing uncertainty over whether the government will be able to enforce the payment of electronic tolls to improve cash flows.
Bergrivier and uMgungundlovu, which are rated at the low end of the rating range for South African municipalities, were affirmed at Baa3.za and their stable outlook remains unchanged, reflecting a greater tolerance to sovereign credit deterioration. Bergrivier's rating affirmation also reflects Moody's expectation for a continuously positive gross operating balances, a slight decrease in the municipality's currently high debt-to-revenue ratio and a consistently sound liquidity position. uMgungundlovu's rating affirmation reflects Moody's expectation of continuously low debt levels and a strong liquidity despite infrastructure spending pressures.
WHAT COULD CHANGE THE RATINGS UP/DOWN
A further weakening of the South African sovereign credit profile could lead to downward adjustments in the ratings of RLGs and government-related companies. Additionally, financial difficulties resulting in cash-flow pressures and consistently high or growing debt levels could lead to downward rating actions independent of sovereign rating movements.
Upward rating pressure to the ratings of RLGs and government-related companies could result from the strengthening of the sovereign credit profile. Evidence of a given entity's ability to display comparatively stronger credit fundamentals and an ability to withstand the deterioration of the operating environment could also exert upward rating pressure.
