Fitch Assigns Johannesburg Long-Term Foreign, Local Ratings of 'BBB+'
Fitch Ratings-Johannesburg/Milan/London-09 September 2009: Fitch Ratings has today assigned the South African Metropolitan Municipality of Johannesburg (CoJ) Long-term foreign and local currency ratings of 'BBB+'. The agency has simultaneously affirmed the city's National Long-term rating at 'AA-(zaf)' and its Short-term rating at 'F1+(zaf)'. The rating Outlooks on the National Long-term rating and the Long-term local currency rating are Stable. The Outlook on the Long-term foreign currency rating is Negative, as it mirrors the Republic of South Africa's rating Outlook.
The ratings reflects Fitch's expectations that Johannesburg will be able to absorb the spending pressures deriving from the upcoming World Cup football tournament in June 2010 and rising operating spending due to staff pay rises and more socially oriented policies. The ratings further reflect the expectation that COJ will be able to maintain its operating margin close to 10%, where it fell in fiscal years 2008 and 2009 due to slowing tax and fee proceeds amid the ongoing economic downturn.
COJ's rating may be lowered in the medium-term if borrowing does not subside, as envisaged, after the completion of major infrastructure projects, and provisions for bad debtors are not raised back to mid-2000s levels of about ZAR1bn to counter the increased risk of the low collection of taxes and fees accrued. Conversely, the city's rating could be upgraded if present macroeconomic pressures ease, and help to restore the operating margin to close to 15%, and the eventual sale of the debtor-book provides liquidity, limiting the need for short-term borrowing to finance working capital.
Johannesburg's operating margin, net of depreciation provisions, declined to about 10% in the fiscal years 2008 and 2009 from an average of 15% in the mid 2000s amid shortfalls in national government subsidies and proceeds from the property tax, based on market values since July 2008. Fitch expects that property rate rises of about 10% and the newly implemented city cleaning levy of ZAR10 per household and business should offset spending pressures from wage contracts and spending related to the upcoming 2010 World Cup, thereby helping to maintain the 10% margin over the medium term. The city's policy to remain cost reflective has also led to increases in tariffs of about 30% for electricity and 10% for water to offset corresponding rises in bulk purchase costs.
Fitch expects Johannesburg's economy to fare better than the expected 1.5% contraction at the national level for 2009, and to eventually fend off the recession due to public sector works related to the international football tournament, centred in Johannesburg, and tourist flows expected in 2010. Nevertheless, the weakening job market and large income inequalities, which have been somewhat exacerbated by flows of immigrants, will make it challenging for the city to limit the slide of tax and fee collection rates towards 90% from about 95% in 2008 amid expectations of a more inclusive socio-economic policy and better social services delivery.
Operating cash flows may subsequently come under pressure and the city, which may face a further delay in the long-awaited sale of the EUR2.5bn net debtor book, could resort to bank credit lines or tap the commercial paper market to fund its growing working-capital needs. Fitch expects Johannesburg to tackle more decisively the growing level of trade payables and receivables, which could exceed ZAR6bn and ZAR15bn, respectively, over the medium term.
Johannesburg's financial debt grew faster than expected to ZAR10.7bn in June 2009, as weaker self-financing capacity led the city to tap the capital markets to fund the upgrading of municipal infrastructure such as energy, water, waste recycling, roads and transport. From the current fiscal year, which started in July 2009, borrowing should decline to slightly above ZAR1bn per annum, and the debt stock should reach ZAR13bn by 2012. Adjusted for resources earmarked in the sinking fund, net debt would remain below ZAR10bn, maintaining the coverage with the current balance in line with the average life of debt of about eight years.
The city is also committed to keeping its debt stock at about 50% of revenue, and interest below 7% of costs. Accelerated borrowing led the nominal debt to surpass the threshold to which a 15 year loan had been covenanted when granted in 2003. However, steps have been taken to cure the breach.
The Metropolitan City of Johannesburg has a population of about 3.5 million people, representing 7% of the national total. CoJ is the financial hub of South Africa, accounting for about 16% of GDP and about 15% of employment, and houses the headquarters of most companies operating in the country.
An updated credit report will soon be posted on Fitch's website, www.fitchratings.com.
Contacts: Raffaele Carnevale, Milan, Tel: +39 02 879087 203; Federico Alfonsi, +39 02 879087 246.
Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com; Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email: hannah.warrington@fitchratings.com.
Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(zaf)' for National ratings in South Africa. Specific letter grades are not therefore internationally comparable.
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