The maturity profile of the debt of South Africa’s major metropoles looks manageable, but there remain severe problems in recovering consumer debt by municipalities. Photo: File
The maturity profile of the debt of South Africa’s major metropoles looks manageable, but there remain severe problems in recovering consumer debt by municipalities. Photo: File

Major municipality debt maturity profiles manageable

By Edward West Time of article published Jul 23, 2021

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The maturity profile of the debt of South Africa’s major metropoles looks manageable, but there remain severe problems in recovering consumer debt by municipalities.

The Development Bank of Southern Africa (DBSA), JSE-listed bonds, and commercial banks are the largest sources of funding for the municipalities, Absa Research said in a note.

Absa was commenting on Moody’s downgrade last week of the global scale ratings (GSR) of five South African municipalities by one notch, downgrades that were largely driven by “material shortfalls in revenue collection at the municipalities.”

According to the data published by the National Treasury, South Africa’s municipal borrowings amounted to R68 billion as of March 2021, up R1bn from a year before.

Of this, R59bn was owed by South Africa’s eight metros, with 38 percent sourced from the DBSA, 28 percent from bonds listed on the JSE, 22 percent from commercial banks and the remaining 12 percent from other sources.

About 15 percent of the borrowings by the metropolitan municipalities were due to mature over the next three years from the 2022 financial year.

Absa said R9.1bn of the debt maturities were covered by sinking funds, which collect cash used to pay off debt when it matures. However, the City of Tshwane said this month it was not mandatory to maintain a sinking fund, and had used its sinking funds to avert a liquidity squeeze during the financial year ending June 2021.

“The reasonably flat debt maturity profile for the municipalities likely explains why Moody’s is more concerned about the impact of negative operating performance, than the debt maturity schedule per se, as it forecasts tight liquidity conditions for the municipalities over the medium term,” Absa said.

Moody’s said it would use the ratings review period, which typically lasts three months, to assess each municipalities’ operating balance, liquidity position, funding requirements and ability to secure additional funding over the medium term.

“Over the next three months, we expect further rating actions with a likelihood of further downgrades, when Moody’s concludes its full credit review process. Moody’s currently assesses a low likelihood of government financial support for the municipalities,” Absa said.

The South African Local Government Association (Salga) said earlier this month that one of the biggest challenges facing local governments was municipal consumer debt, which the National Treasury estimated at R230 billion as at December 30, 2020.

“To illustrate the prevalence and pervasiveness of this, on average almost 63 percent of the revenue shown in the books will never find its way into the bank accounts of the municipality. Hence 49 percent of municipalities have outstanding creditors that are greater than available cash at year-end.”

“This is the precarious financial environment in which municipalities find themselves, which contributes to the low collection rate, and thereby affecting their budgets. This underscores the call that Salga has been making towards a review of the financing model for local government,” Salga said.

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