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South Africa at risk of credit downgrade due to Cape Town drought

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Downgraded - [http://www.debatingeurope.eu/wp-content/uploads/2013/02/downgraded.png] Downgraded - [http://www.debatingeurope.eu/wp-content/uploads/2013/02/downgraded.png]

Cape Town’s impending Day Zero is likely to have a severe knock-on effect across the entire national economy, widely affecting a number of sectors, and resulting in a possible credit rating downgrade for South Africa.

Speaking to the Citizen on Tuesday, economist Mike Schussler said that the water crisis is several times worse than load shedding, as not having access to water is relatively permanent compared to rolling blackouts.

This could lead to a number of businesses and industries looking at semigrating so that they can continue business operations in the country, he said.

Depending on how long the drought lasts, he believes that major industries such as IT, transport, agriculture as well as exports will all be significantly impacted as water scarcity limits businesses and causes Capetonians to look for greener pastures.

“We saw with the electricity crisis that South Africa missed out on a lot of growth. A water crisis to me is a few times worse. There’s no rolling blackouts with water. It’s permanent,” Schussler said.

“The impact is going to be quite large for all of us. The ratings agencies look at the overall growth of the country and the population growth.The impact is probably a downgrade.

“This makes the cost of capital more expensive. When firms want to borrow, it will keep interest rates higher for longer,” he said.

Cape Town credit negative

The water crisis afflicting Africa’s top tourist destination is credit-negative as it will reduce revenue at a time when the city has to boost spending to ensure supplies, Moody’s Investors Service said in a report on Monday.

The report doesn’t constitute a rating action, said Moody’s, which has an investment-level rating on Cape Town’s bonds.

“Municipal water revenue contributed about 10% of Cape Town’s operating income in 2017, a proportion that is set to dwindle as the city restricts water usage. At the same time, spending on crisis management and water supply projects will increase,” Moody’s Associate Analyst Daniel Mazibuko said in the report.

Two main industries — tourism and agriculture — will feel the effect, leading to lower employment and tax income, he said.

“Other effects include threats to public health from poor sanitation and, more generally, to social order, which is significant given Cape Town’s marked income inequality,” Mazibuko wrote.

“If the crisis persists, it remains to be seen how the city will cope with the unfolding crisis’ potentially wide-ranging consequences on the city’s finances and economy.”


 

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