Ratings agency Global Credit Rating last week adjusted Johannesburg’s ratings outlook to negative due a lack of audited financial statements.
The Johannesburg municipality is walking a financial tightrope after a ratings agency reacted to the city’s lack of financial compliance.
A Moody’s-affiliated ratings agency, Global Credit Rating (GCR), last week placed the City of Johannesburg (CoJ) on a negative ratings watch.
GCR stated that the move was due to “material uncertainty in the audit process” and the failure to have its financial statements signed off by the Auditor-General of South Africa.
“GCR continues to engage with CoJ and will update the rating once the financial accounts are finalised, and the impact of the disputes on the ongoing financial performance can be assessed.”
“If the audited financial statements for fiscal 2025 are not made available in due course, the ratings may be suspended due to insufficient information,” the rating agency stated last week.
‘Financial flexibility and service delivery’
The municipality has indicated that the financials will be signed off by the end of May, with the rating agency confirming the situation could be rectified.
“The rating outlook could revert to stable if the Auditor General substantially accepts the submissions from CoJ and there are adequate mechanisms to prevent audit delays in future audits,” GCR stated.
Chief Economist at the Bureau for Economic Research, Lisette Ijssel de Scheepers, said that the decision was “an early warning rather than an immediate crisis” that gave the city breathing room.
However, if the municipality did not meet the deadline, it could have severe consequences.
“Failure to act could materially constrain the city’s financial flexibility and service delivery capacity over time,” the economist told The Citizen.
Ijssel de Scheepers explained that weaker outlooks “typically lead to higher perceived risks” for financial institutions.
“This may lead to higher borrowing costs, as lenders demand increased interest rates to compensate for risk, or even reduced access to funding, particularly from institutional investors with strict credit requirements.
“If the underlying issues driving the downgrade are not resolved, the outlook downgrade could eventually translate into a full credit rating downgrade.
“Over time, this may lead to sustained increases in debt-servicing costs, placing pressure on the city’s operating budget,” Ijssel de Scheepers concluded.
‘Deeper issue is capability’
Following the ratings downgrade, Chartered Governance Institute of South Africa (CGISA) CEO Stephen Sadie wrote that South African municipalities were short on expertise, not governance policies.
Bemoaning the state of basic service delivery in the country, he argued municipalities had been crippled by political loyalty being placed above efficient management.
“The deeper issue is capability. Bulk water systems are complex, technical operations. Yet many of the responsible entities lack sufficient engineering expertise at board level.
“What is missing is not knowledge, nor frameworks, nor solutions. What is missing is the will to appoint the right people to our governing bodies.
“Until that changes, the country will remain trapped in its current contradiction: a world-class governance framework, and a lived reality that falls well short of it,” Sadie stated.
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