International ratings agencies have affirmed a stable economic outlook for the city, cementing its position as the business hub of the nation.
THE latest credit ratings from the international ratings agencies, Moody’s and Fitch, have affirmed a stable economic outlook for Johannesburg, which augurs well for investors.
For the 2010/11 financial year, Moody’s affirmed the City’s national scale long- and short-term credit rating at Aa3.za and P-1.za; Fitch affirmed equivalent ratings at AA-.zaf and F1+.zaf.
These ratings reflect the city’s status as a business capital and the main financial and economic centre of the country, which allows it to benefit from a broad tax base, according to Floyd Sibandze, the head of investor relations in the City’s treasury department.
Sibandze explains that a credit rating is a formal assessment of an organisation, government, individual, conglomerate or country. “It is a particularly important score in that it determines whether or not an organisation or individual or country is able to exercise sound financial management. Managing a healthy credit score is particularly important, especially if there are plans to take on debt for numerous initiatives.”
A credit rating allows a lender or credit granter to evaluate the ability of the borrower to repay a loan, he adds. “A low credit rating is considered a sign of a high risk of non-payment of debt, while a high credit rating has the potential to qualify one for more credit facilities.
“It is our view that with a stable outlook, the City remains attractive to investors. This is evidenced by the fact that in March 2011, the City was able to raise R850-million from its JoziBond (COJ-07) towards funding its capital expenditure. This was well received by investors,” says Sibandze.
There are several factors that underlie the City’s credit strengths: it is the largest economic base in the country; it has a sound budgetary management and control system; and it is committed to financial recovery. However, there are areas where it needs to improve, namely reducing its high debt burden, lessening liquidity pressure and eradicating a large service backlog.
“To ensure that we maintain high credit ratings, we are reducing customer queries and revenue collection is stabilising, which will lessen the liquidity pressure. In addition, the City must continue to build the strength of its balance sheet,” says Sibandze.
In terms of current financial position and performance, Joburg is the largest South African city in terms of its budget size, with total revenue of R25,5-billion in the 2010 financial year. In 2008/09 in particular, municipal accounts suffered from the effects of the economic slowdown on revenue collection and the peak in capital expenses associated with the infrastructure for the 2010 FIFA World Cup™.
This led to liquidity tension and significant borrowing, according to Moody’s.
To address its liquidity problems and restore its budget, the City committed itself to a Financial Stability Plan, organised in three phases, namely stabilisation, consolidation and sustainability.
This plan focuses on improving the revenue collection rate and a review of the tax/tariff system. The completion of phase one of the plan was realised in the unaudited financial statements for the 2010 financial year.
Despite a general improvement in financial results, budgetary results remain tight and reflects the expenses, notes Moody’s. The liquidity profile also remains under pressure, as reflected by the deterioration in cash resources and revenue collection levels that remained flat overall and below the target of 94 percent.
In 2011, cash flows are expected to improve through the implementation of asset-leveraging initiatives and the continued use of short-term finance mechanisms, which have led to the reduction of overdraft facilities.
The City’s two major service companies, Johannesburg Water and City Power, which together employ about 6 000 people, are profitable and do not need subsidies from the City to run their operations. These companies have their own investment programmes aimed at reducing water and electricity losses and serving their expanding customer bases.
The City continues to perform in line with Fitch Ratings’ expectations. The agency predicts that a growing tax base and rate increases should push the property tax close to R5-billion over the medium term, up from R4-billion in 2010.
Fitch sees the City’s annual net long-term borrowing moderating to about R1-billion a year over the medium term, down from the pre-World Cup R2-billion. However, its debt outstanding will edge towards R14-billion.
Joburg has approximately four million residents and is home to most of the corporate headquarters and largest listed companies in the country. Gauteng, its home province, contributes more than 33 percent of the country’s gross domestic product (GDP) and displays a GDP per capita 60 percent higher than the national average.
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