Rating house Fitch Ratings has affirmed the City of Johannesburg's (COJ) long-term and short-term ratings, saying it is improving its liquidity and working capital.
“The rating affirmation reflects the continued improvement in COJ's liquidity and working capital in line with Fitch's expectations, as well as moderate borrowing, which has stabilised debt at around 45% of revenue and equal to less than 10 years of the current balance,” says Fitch, in a statement.
However, Fitch notes in its statement the city has failed to improve the average tax and fee collection rate towards the standard level of 95% in recent years. It adds Johannesburg has not controlled the “growth of trade payables, which spiked to R8.3 billion”, based on preliminary figures for the year to June.
As a result, says Fitch, these factors could lead to a downgrade. However, an improved operating margin, closer to 15%, and stronger cash balances compared with debt could lead to an upgrade, it says. “Conversely, an operating margin improving towards 15% and a debt-to-current balance strengthening below five years could lead to an upgrade.”
The city has come under fire for not having enough cash reserves, ending the year with only R681 million in the bank, a cover of only three days, compared with National Treasury's requirement that municipalities have three months' worth of revenue in the bank.
The situation was blamed on the municipality's billing crisis, which affected about 65 000 of its more than a million accountholders. The crisis was the result of post-implementation issues with project Phakama, and its moves to an integrated SAP billing system.
As a result of the billing issue, the city has battled to collect payments as residents query bills. Democratic Alliance shadow finance MMC Patrick Atkinson has said the city is making progress in overdue arrear amounts after having previously only achieving an 88% rate.
Future outlook
Fitch understands the spike in money owed to the city, from R11 billion in 2010 to more than R15 billion in 2011, was because bills spilled over into the next year “following the implementation of a new integrated accounting system”.
The rating company notes the city is reviewing its 2012 to 2014 budget, and says a R4 billion projected surplus by 2014 is realistic. However, the weaker economic environment could place pressure on improving cash flows, says Fitch.
Fitch expects the balance of cash and other short-term financial assets to strengthen to about R1.5 billion. Receivables should remain at around R7 billion, roughly balancing out the level of payables, and strengthening the overall liquidity position, says Fitch.
Chuffed city
The city says the affirmation “reflects a confidence in the administration's capacity to manage the financial affairs of SA's largest city”.
City manager Trevor Fowler says the city notes the concerns raised about tax and fee collection rates, but is confident the consolidation of the new systems in its revenue department is yielding a positive trend.
Fowler notes that Fitch has indicated an operating margin improving towards 15%, and a debt-to-current balance strengthening below five years could lead to a future upgrade in the ratings.
The Fitch report makes positive remarks on the city's progress in consolidating its capital budget. With investment declining to pre-2010 Fifa World Cup levels of R4 billion, Johannesburg has posted its second consecutive year of overall balanced budget, according to Fitch's calculations, says the city in a statement.
Member of the Mayoral Committee councillor Geoff Makhubo adds: “The report confirms that Johannesburg's finances are in a healthy state, despite the impact of the global recession. This confidence is also reflected in the decisions of fund managers in the private sector who have, in the past year, participated in the municipal bonds issued by the city.”
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