Moody’s blow to municipal issuers of debt

THERE is little doubt that the Moody’s downgrade of subsovereign debt issuers is significant from practical and conceptual perspectives. The downgrade will imply higher debt costs for local government debt issuers and these could be passed on to residents.

But the Democratic Alliance’s (DA’s) response to the downgrade following a national downgrade in line with other rating agencies is curious. To imply that it will hit Gauteng the hardest as the DA has is a distortion of Moody’s rationale and overlooks the assumptions behind the downgrade on the state of local government in South Africa.

Commentators have attributed the sovereign downgrade to instability created by leadership tussles in the African National Congress and the uncertainty this has implied for macroeconomic policy and therefore investor sentiment. This is surely where opposition leaders should take aim?

Instead the DA’s Mike Moriarty honed in on Gauteng’s metros; arguing that the downgrade was not only "due to economic and political uncertainty" but also "the financial crises and absence of proper financial accountability in (Gauteng metro) municipalities" that "undeniably worsened the situation".

This view overlooks the fact that the DA’s flagship Cape Town was also subjected to a similar downgrade. The DA should challenge the downgrade if it is of the view that Cape Town’s governance is superior to other metros.

Indeed if local government was downgraded on the basis suggested by Moriarty it should have taken place after the release of the auditor-general’s report on local government with varying outcomes per issuer. But the downgrade took place in a fairly blanket fashion due to the "centralised architecture of the local public sector in South Africa".

This view is perhaps the most significant component of the downgrade — Moody’s suggests that intergovernmental relations in South Africa "establishes close operational and financial linkages between the national government and municipalities". The reasoning is that where municipalities are able to collect a large portion of their own revenue they "are exposed to varying degrees to the country’s macroeconomic performance and socioeconomic conditions" mirroring the national economy "while small municipalities feature high reliance on government transfers for operations and capital investments".

This view dovetails with emerging policy consensus that there is no "one size fits all" for local government (with some powerful large entities following a distinctly different trajectory from smaller income-reliant municipalities). From a ratings perspective this is damning. Where fiscal autonomy applies (in large cities) negative national economic trends prevail and where municipalities are reliant on national revenue "centralised architecture" ties them to the national fiscus.

Moody’s does make two exceptions in its analysis. Rustenburg and Amathole retained their ratings on the basis of "stronger fiscal and liquidity positions" and other municipalities between Baa1.za and Baa2.za retained their ratings "reflecting greater tolerance of lower ratings to sovereign credit deterioration".

In effect fair-sized but not very large municipalities were the least affected by the downgrade. The Gauteng analysis of the DA’s is therefore perplexing.

The other consideration specific to local government in the downgrade of Cape Town Ekurhuleni Johannesburg Nelson Mandela Bay and Tshwane as well as "medium-sized municipalities" was that strong economic bases were not only compromised by "macroeconomic performance" but also "socioeconomic conditions" — growth that cannot keep up with the pace of the need for "welfare benefits and economic infrastructure" given "moderate to high debt levels".

It is well known that DA-run municipalities have bemoaned the implied costs of domestic migration and the double whammy of a stuttering economy combined with welfare demands applies equally to all metros and large cities across South Africa. Again where the DA might wish to take issue is around the generalised description of "moderate to high debt levels" and the ability of individual municipalities to respond to this challenge.

While the downgrade is a blow to local-government debt issuers perhaps the greater concern should be a poorly nuanced view of municipalities.