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Johannesburg – The City of Johannesburg will avoid the international debt market, which is treating borrowers as if the nation’s credit rating has already been cut to junk, said Rabelani Dagada, the city council’s new finance chief.
South Africa is at risk of losing its investment-level credit status as S&P Global Ratings and Fitch Ratings review their assessments in December. Both kept their ratings at one level above junk in June, and S&P kept the negative outlook, and said the government must take decisive measures to bolster economic growth, quell policy uncertainty and end political turmoil to avoid a future downgrade.
“The bond market is not favourable because the debt market is already treating South Africa as if we have been downgraded,” Dagada said Friday in an interview at Bloomberg’s Johannesburg offices. The city will borrow local because “it’s cheaper,” he said.
The Johannesburg council plans to raise R2.5bn in the fiscal year that ends June 30 next year through the state-owned Development Bank of Southern Africa, which will help fund infrastructure programmes, Dagada said. The 45-year-old former academic became head of the finance portfolio after the opposition Democratic Alliance took control of South Africa’s biggest city with five million people, following the August 3 municipal elections.
If the country loses its investment-grade rating, it will hamper Mayor Herman Mashaba’s plan to achieve 5% annual economic growth in Johannesburg in the next five years, Dagada said. The city’s economy expanded an average 2% per year between 2008 and 2014, according to its 2015 annual report.
“It will affect us big time,” he said. “As much as we want to grow by 5%, that is one of our worst fears. If we get downgraded to junk, our ambitions can’t happen.”
Moody’s Investors Service rates the City of Johannesburg’s debt at Baa2, the second-lowest investment-grade level, and the same as the national assessment. The city will issue a tender for another ratings company because most international lenders prefer to see at least two credit assessments, Dagada said.
The yield on Johannesburg’s rand notes due June 2018 were little changed on Friday at 9.07%, while the yield on South African government rand-denominated debt due December 2026 fell one basis point to 8.69%.
The city council plans to rein in spending, improve revenue collection and ensure that debt does not grow to a proportion of more than 45% of its R55bn budget, Dagada said. Johannesburg’s debt is currently 31% of its budget, he said.
“Our studies show us that Parks Tau’s administration were under-billing by about R4bn,” he said referring to the city’s former mayor. As a result of the inefficient billing system, many small and medium-sized companies were “consuming electricity for free.”
