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Higher local taxes feared after Moody’s downgrade

Wednesday, 03 October 2012   (0 Comments)
Posted by: SAIT Technical
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By Linda Ensor and Ntsakisi Maswanganyi (Business Day)

MOODY's ratings downgrade of several municipalities could result in consumers paying higher municipal taxes in the long term, says Treasury spokesman Jabulani Sikhakhane.

The agency downgraded the long-term ratings of 12 local governments yesterday and changed its outlook to negative from stable on a further seven. Five metropolitan councils — Cape Town, Ekurhuleni, Johannesburg, Tshwane and Nelson Mandela Bay — were affected.

This followed Moody's downgrade of SA's sovereign bond rating last week on concern about the government's "diminished capacity” to handle its political and economic challenges.

The downgrade would not have an immediate effect on municipalities' existing debt, Mr Sikhakhane said, only on their future borrowings — and then only if it resulted in higher interest rates, which was not a foregone conclusion.

If finance charges became too costly, the other option to raising municipal taxes was to scale back capital expenditure.

But Mr Sikhakhane noted that the larger metropolitan governments had the capacity to raise their own revenue and deal with additional costs. External municipal borrowing would, in any event, be limited as municipalities lacked the capacity to spend their budgets.

"Borrowing has to be matched by a capacity to spend, which is not there,” he added.

Moody's said yesterday that its negative outlooks on all "South African sub-sovereigns” mirrored the negative outlook on SA's sovereign rating and reflected systemic pressure.

Reserve Bank governor Gill Marcus urged the government to address the issues raised by Moody's, to "ensure that there are no further downgrades”.

"They are real issues being raised by Moody's and I think it's very important that the government look at that and address it,” Ms Marcus told a Nordic-SA business function in Johannesburg yesterday.

She agreed that it was "premature” to predict what the effect on the cost of borrowing will be for these institutions. "Many of them have already raised the finances they want.... We'll look for the knock-on effect‚” she said.

Despite the government's attempts to expand private sector funding of local government, it remains small. Total municipal borrowing was R45.5bn at end-June.

Short and long-term bonds issued by the cities of Johannesburg, Cape Town and Ekurhuleni amounted to R14.5bn and represented about 2% of government bonds listed on the JSE.

Municipalities are only able to borrow on the capital market for infrastructure spending, but in the year to end-June they managed to spend R33.2bn (75.2%) of their aggregate capital budget of R46bn.

The capital budget for metros was R22bn, of which R17.5bn (79,5%) was spent.

Banks were the main lenders to municipalities last year at R25.7bn, followed by the Development Bank of Southern Africa at R15.7bn and the Infrastructure Finance Corporation's R1bn. To eradicate backlogs and provide new infrastructure, municipalities required R50bn over the next 10 years, Luther Mashaba, the bank's group executive, told Parliament last week.

"Borrowing by intermediaries will play an important role in addressing these backlogs as fiscal transfers are unlikely” to be enough.

Mr Mashaba noted that the credit appetite for municipal debt among commercial banks and asset managers had increased.

Absa Capital economist Jeff Gable said yesterday he believed the "arguments for and against a downgrade were equally balanced. I don't think it will happen in 2012, but there is a lot to play for in 2013.”



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