A credit downgrade looms for the City of Cape Town as the adverse financial effects of the water crisis become apparent.
The City has increased its borrowing of funds for the first time in four years as the water crisis slices through its funds. This will in turn cause the City’s debt to rise sharply over the next three years.
The Mayoral Committee met on Tuesday to discuss Moody’s Investors Service, a credit rating agency, about the possible review of a downgrade.
Moody’s has rated Cape Town on a Baa3 rating, which is the lowest investment grade. The report also shows that as of 15 February 2018, the City of Cape Town is stable, but has noted that the water crisis has constrained the City’s credit profile.
“The City’s credit profile is constrained by Cape Town’s severe water shortages, the result of several years of drought, which will have a direct impact on the City’s water revenue, as well as having indirect economic and societal effects. The City has increased its capital spending plans, largely because of spending on water-related infrastructure, which will substantially increase its debt,” the report says.
With the drought being the most severe in the City’s history, there is an expected need for more loans. More finances are now required for the costs of water augmentation projects. The downgrade will not have an undue effect on existing loans, but will make it difficult for the City to apply for new ones.
Moody’s report states that Day Zero will hit the agricultural sector the hardest, as it consumes up to 30% of the province’s water per week. This threatens food supply.
In it’s adjustment budget for 2018, the City reduced revenue from water sales to R4.2-billion from R6-billion. This equates a 31% reduction in water revenue as a result of a fall in water consumption charges.
Cape town’s debt is made of up of 70% local bonds, and 30% in bank loans. These are all secured at fixed rates.
In July 2017, the City launched its first green bond in a R1-billion issuance to finance water, sanitation and transport projects. A green bond is a tax-exempt bond to utilise areas of land that are underutilised, and contain low levels of industrial pollution.