Fitch Affirms City of Johannesburg at 'BBB'; Outlook Stable

Fri Jan 17, 2014 11:58am EST

MOSCOW/MILAN/LONDON, January 17 (Fitch) Fitch Ratings has affirmed Johannesburg's Long-term local currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. The agency has also affirmed the National Long-term rating at 'AA-(zaf)' with a Stable Outlook, the National Short-term rating at 'F1+(zaf)' and the National senior unsecured ratings on the outstanding bonds at 'AA-(zaf)'. KEY RATING DRIVERS The affirmation of the City of Johannesburg's ratings reflects the following rating drivers: Fitch believes the city's operating margin will remain sound over the medium term, at ZAR5bn or 15% of operating revenues, with operating revenues growing towards ZAR40bn by 2016, from ZAR33bn in 2013. Fitch expects the city to retain a fairly balanced budget, although the expansion of basic service delivery to a growing population may put pressure on operating spending. The city's commitment to streamline costs, together with a reduction in municipal entities to 11 from 15, should contain operating spending growth to about 10% a year over 2014-2016, roughly in line with revenue growth. We expect economic growth to strengthen to 3% in 2014, but economic challenges may continue to hamper the city from achieving the 5% annual growth of past years and from reducing the unemployment rate from the current 25%. Low job participation rate and income inequalities compared with international standards continue to limit revenue generation potential. Fitch expects delays in tax collection and payments to keep budgetary performance under pressure, with net receivables and payables remaining close to ZAR9bn and ZAR10bn, respectively. Fitch will closely monitor the city's receivables and payables. The city's ZAR100bn investment plan over the next decade, with capital spending rebounding to above 20% of total spending, is aimed at expanding electricity, water, transportation networks and providing housing to its growing population. As capital revenues will likely fund a third of investments over 2014-2016, Fitch believes the city's deficit before debt variation will be contained at ZAR2bn, or 5% of total revenue, limiting borrowing requirements but depleting reserves. Working capital is likely to decline to ZAR1bn by FY16 from ZAR3bn in FY13. Financial debt stood at ZAR12.5bn at end-2013 which Fitch expects to rise to ZAR17bn by FY16. However, debt should remain at below 50% of consolidated revenues, or roughly 100% of the administration's core budget, while interest cover by operating surplus is likely to remain at 3x. That the city has earmarked ZAR2.5bn for debt repayment provides additional comfort for debt service sustainability. Free/unencumbered cash declined by ZAR1.1bn over the six months to December 2013 to ZAR1.5bn, roughly matching interest expenses. RATING SENSITIVITIES Future developments that could lead to positive rating action are: -An operating margin above Fitch's base case scenario, falling receivables and payables and a debt to current balance of below five years Future developments that could lead to negative rating action are: -Stagnation in the economy, including rising unemployment, leading to a failure to improve tax collection rates towards 95% and net receivables and payables growing beyond Fitch's base case scenario Contacts: Primary Analyst Sergio Ciaramella Director +39 02 87 90 87 216 Fitch Italia S.p.A. 1, Vicolo S. Maria alla Porta 20123 Milan Secondary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Committee Chairperson Vladimir Redkin Director + 33 1 44 29 91 34 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated August 2012, 'International Local and Regional Government Rating Criteria', dated April 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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