A credit downgrade looms for Cape Town as the water crisis slices through its funds, prompting the City to increase borrowing for the first time in four years while debt is expected to rise sharply over the next three years.
The mayoral committee met on Tuesday to discuss credit ratings agency Moody’s review for a downgrade.
Moody’s has Cape Town on a Baa3 rating, which is the lowest investment grade. Moody’s report of February 15 says the credit profile of the City of Cape Town is stable, but also noted that the water shortages have constrained the City’s credit profile.
“The City’s credit profile is constrained by Cape Town’s severe water shortages, the result of several years of drought, which will have a direct impact on the City’s water revenue, as well as having indirect economic and societal effects. The City has increased its capital spending plans, largely because of spending on water-related infrastructure, which will substantially increase its debt,” the report says.
Mike Schussler, economist at economist.co.za, said any downgrade for any entity or government would mean it would cost more to make and pay debt.
"For a municipality like Cape Town, it would mean that their debts repayments would cost more. With the drought being the worst in the city's history, it is expected that needs for loans and other finance would be required due to loss of water sales and the costs for augmentation projects. The downgrade won’t affect existing loans so much, but to apply for new ones could also be very difficult,” he said.
Moody’s said Day Zero would hit the agriculture sector hardest as it consumes up to 30% of the province’s water per week, threatening food supply.
“In its adjustment budget for the year 2018, the City reduced revenue from water sales to R4.2 billion from R6bn which is equivalent to a 31% reduction in water revenue, due to a fall in water consumption charges. Cape Town’s water crisis could have a more serious effect on the City finances if Day Zero becomes a reality and the taps are turned off, resulting in around four million residents having to collect water from 200 water stations across the city. This could also increase operating costs,” it said.
Moody’s report further notes that there is little likelihood of an upgrade to Cape Town’s global scale rating, as the standalone credit profile is constrained by the sovereign (national) rating.
“An upgrade of Cape Town’s global scale rating would likely require an upgrade of the sovereign rating A downgrade of the sovereign rating would likely lead to a downgrade of Cape Town’s ratings.
"Furthermore, Cape Town’s ratings would come under pressure in the event of deterioration in fiscal discipline,” it said.
Cape Town’s debt is made up of local bonds (70%) and bank loans (30%), all at fixed rates.
“Challenges associated with the water crisis have prompted the City to increase borrowing for the first time in four years. In July last year, the City launched its first green bond in a R1bn issuance to finance water, sanitation and transport projects. The City plans to spend about R21.8bn on capital infrastructure from fiscal 2018 to fiscal 2020.
"If it fully implements its capital spending plans, net direct and indirect debt will increase substantially to 26% of operating revenue by fiscal year 2020, from a low 11% in fiscal year 2017,” Moody’s said.
A report, signed off by Mayor Patricia de Lille, read: “The City has been given a high global scale rating.
"Any movement in the rating of the sovereign will impact directly on the City’s global scale rating.”
Johan van der Merwe, mayco member for finance, asked for questions to be e-mailed. There was no reply at the time of going to print.
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