City retains top financial rating for fifth consecutive year
Independent ratings agency Moody's International today announced that the City of Cape Town has retained its double-A credit rating for the fifth consecutive year.
Despite an overall trend of down-grading in other metros across South Africa, the City has held onto its Aa2.za/P-1.za rating with a stable outlook in the annual rating review. This means that the City has shown strong budgetary performance and is in a good liquidity position.
"The fact that the City has held onto this rating for five consecutive years is exceptional. A consistently high rating can assure investors and residents of the sound financial management and leadership of the municipality. On a practical level, the stronger rating will allow the City lower interest rates from banks and other financial institutions - placing us in a stronger financial position," said the City's Mayoral Committee Member for Finance, Alderman Ian Neilson.
The Aa2.za once again places Cape Town at the high end of the five metropolitan municipalities rated by Moody's in South Africa, whose ratings span from Aa2.za to Aa3.za. Cape Town compares favourably with the other metros in terms of both budgetary performance and management, and displays a relatively robust economic base.
The report's judgement of a ‘stable outlook' reflects the expectation that the City will maintain its key financial ratios and relatively strong financial position in the medium-term, supported by an overall prudent financial policy and a relatively large and evenly diversified economic base. In addition, Cape Town's revenue continues to display consistent overall steady growth.
In terms of management, the report states that Cape Town's administration reflects proper financial governance, which is geared towards maintaining the City's strong financial position. The City is recognised for adhering to prudent policy strategies with respect to financial, debt and liquidity management. It notes the regular monitoring of budget execution and cash flows and states that the ‘administration is committed to reinforcing internal controls'. This is evidenced by the fact that the City received an unqualified audit report for the 2010 financial year - its seventh consecutive clean audit.
The credit analysis section of the report commends Cape Town for having ‘managed to navigate fiscal pressures associated with the economic crisis in the 2008 - 2009 financial years'. Cape Town has been able to sustain liquidity pressure which emanated from the financial crisis and recorded a good liquidity position for the 2010 financial year, with its cash balance totalling R4,7 billion. Cape Town's liquidity ratio increased from 1,2 in 2009 to 1,3 in 2010 - compared with Johannesburg at 0,4; the Nelson Mandela Metropole at 1,1; and Ekurhuleni at 0,6.
The report further states that historical and consistent fiscal discipline has allowed Cape Town to record operating surpluses, averaging 6,1% of operating revenues during the 2006 - 2010 financial years. In addition, the debtors collection rate was maintained at an average of 95% in 2006 - 2010, which enabled a moderate increase in debt exposure
Summary of the report
Based on the City's revenue of R18,7 billion for the 2010 financial year, Cape Town is the second largest city in South Africa.
Capital expenses amounted to R4,7 billion, or 25% of total municipal expenses in 2010.
Strong revenue growth in the past few years reflects an increase in property tax rates and service charges, notably electricity tariffs levied by Eskom.
Cape Town's revenue is mainly driven by service charges and property tax income, together representing 76% of operating revenue, whilst operating government grants and subsidies contribute 15%.
Operating grants are expected to decrease to approximately 7,5% of municipal operating income in the near future.
The high proportion of discretionary own-source revenue (around 93%) demonstrates the city's autonomy in setting property rates and service tariffs, which in turn theoretically offer a high degree of revenue flexibility.
Fiscal transfers have remained high, in line with those of the 2009 financial year when the City was implementing capital projects in preparation for the 2010 FIFA World CupTM.
In the 2010 financial year, Cape Town's net debt exposure amounted to R5,582 million, or 33% of its operating revenue.
Cape Town did not issue any debt during the 2011 financial year because strong cash reserves enabled the City to finance about half of its capex with own-sourced funds.
Statement issued by Alderman Ian Neilson, Mayoral Committee Member: Finance, City of Cape Town, June 29 2011
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