Fitch upgrades Johannesburg a notch

This was after the agency affirmed the city’s national long-term rating and the national senior unsecured ratings on outstanding bonds to AA (zaf) from AA- (zaf), and the national short-term rating at F1+ (zaf) with a stable outlook.

Johannesburg mayor Parks Tau said the upgrade was “an affirmation that indeed the city is a safe and preferred destination for investment by investors”.

“It is a credible endorsement of Johannesburg’s financial stability at a time of great uncertainty in the global markets, rising interest rates, and currency fluctuations. The rating is also a reflection of the quality of leadership and their ability to manage an annual budget of more than R50 billion,” Tau said.

“This is a clear reflection of a city that is anchored on transparency, accountability, and clean governance which also justifies our position as an economic hub of South Africa.”

In 2004, the city issued a COJ02 credit enhanced bond that was 40 percent partially guaranteed by the International Financing Corporation (IFC) and Development Bank of Southern Africa (DBSA). This resulted in Fitch assigning an AA+ (zaf) rating – a notch higher than the issuer rating of AA (zaf). The partially guaranteed COJ02 bond still had an outstanding amount of R333 million to be redeemed by September 2016 through the redemption fund.

The rating agency further assigned the city a long-term local currency issuer default rating (IDR) to allow it to source funding in the Eurobond Market, and affirmed Johannesburg’s local currency IDR at BBB with a stable outlook.

The affirmation of the BBB IDR reflected Fitch’s expectations of Johannesburg’s low debt over the medium-term.

“This also affirmed the robust budgetary performance of the city by international standards as well as the conservative financial management aimed at maintaining high levels of liquidity and potential national support in light of Johannesburg’s important status as the largest city in South Africa.

Key rating drivers included:

– Johannesburg continued to perform in line with Fitch’s expectations with an operating margin close to 15 percent of revenue in the 2015 – 2017 fiscal years. The current balance would fund up to two-thirds of capital spending, which was expected to rise towards R10 billion by the 2017 financial year, from about R7.5 billion;

– Fitch viewed Johannesburg’s debt as sustainable at around 40 percent of recurrent revenues. The gross stock of bonds and loans accounted for R15.8 billion in June 2015 and would likely rise to R20 billion by 2017 to partly fund capital spending;

– Johannesburg aimed to maintain cash balances around R4 to R5 billion – well in excess of annual debt servicing requirements; and

– Johannesburg was the wealthiest city in South Africa with an estimated GDP per capita of about 50 percent above the national average of US6500, and was and the nation’s financial and corporate hub. Against a backdrop of national economic slowdown, Fitch expected activity generated by the implementation of the city’s R100 billion 10-year investment plan to support the performance of Johannesburg’s economy. Furthermore, Fitch expected Johannesburg to lead with an average GDP growth of two to three percent per annum over the medium-term, conducive to an expanding tax base when coupled with the slightly rising population. - ANA

(File photo: Gallo Images)