Junk-Rate Concern Deters Johannesburg From Foreign Debt

  • Bond market ‘not favorable,’ city’s new finance chief says
  • City to issue tender for another credit-rating company

Johannesburg, South Africa’s economic hub, will avoid the international debt market, which is treating borrowers as if the nation’s credit rating has already been cut to junk, said Rabelani Dagada, the city council’s new finance chief.

South Africa is at risk of losing its investment-level credit status as S&P Global Ratings and Fitch Ratings Ltd. review their assessments in December. Both kept their ratings at one level above junk in June, and S&P held its negative outlook, and said the government must take decisive measures to bolster economic growth, quell policy uncertainty and end political turmoil to avoid a future downgrade.

“The bond market is not favorable because the debt market is already treating South Africa as if we have been downgraded,” Dagada said Friday in an interview at Bloomberg’s Johannesburg offices. The city will borrow locally because “it’s cheaper,” he said.

The Johannesburg council plans to raise 2.5 billion rand ($180 million) in the fiscal year that ends June 30 next year through the state-owned Development Bank of Southern Africa, which will help fund infrastructure programs, Dagada said. The 45-year-old former academic became head of the finance portfolio after the opposition Democratic Alliance took control of South Africa’s biggest city with five million people, following the Aug. 3 municipal elections.

If the country loses its investment-grade rating, it will hamper Mayor Herman Mashaba’s plan to achieve 5 percent annual economic growth in Johannesburg in the next five years, Dagada said. The city’s economy expanded an average 2 percent per year between 2008 and 2014, according to its 2015 annual report. South Africa’s gross domestic product will probably grow 0.4 percent this year, the slowest pace since a 2009 recession, and 1.2 percent next year, according to the central bank.

“It will affect us big time,” he said. “As much as we want to grow by 5 percent, that is one of our worst fears. If we get downgraded to junk, our ambitions can’t happen.”

Moody’s Investors Service rates the City of Johannesburg’s debt at Baa2, the second-lowest investment-grade level, and the same as the national assessment. Moody’s will release the results of its review of the nation’s sovereign debt on Nov. 25. The city will issue a tender for another ratings company because most international lenders prefer to see at least two credit assessments, Dagada said.

The yield on Johannesburg’s rand notes due June 2018 were little changed at 9.08 percent at 5:59 p.m. on Monday, while the yield on South African government rand-denominated debt due December 2026 rose less than one basis point to 8.70 percent.

The city council plans to rein in spending, improve revenue collection and ensure that debt does not grow to more than 45 percent of its 55 billion rand budget, Dagada said. Johannesburg’s debt is currently 31 percent of its budget, he said.

“Our studies show us that Parks Tau’s administration were under-billing by about 4 billion rand,” he said, referring to the city’s former mayor. As a result of the inefficient billing system, many small and medium-sized companies were “consuming electricity for free.”

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