Regional and Local Governments (RLGs) Moody's Approach - JUNE, 2018 - salga
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Regional and Local Governments (RLGs) Moody’s Approach SALGA – Municipal Innovative Infrastructure Financing Conference JUNE, 2018
Agenda
1. Moody’s Sub-Sovereign Group
2. List of rated RLGs in South Africa
3. List of Metros and secondary cities
4. Moody’s RLGs Rating Approach
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 3
Moody’s Sub-Sovereign Group
Sub-Sovereign – A global presence
49 analysts/associates located in 17 offices, serving 44 countries
16 different nationalities speaking 17+ languages
USD 1.51 trillion rated debt
Stockholm
Moscow
Toronto London
Paris Prague
New York Frankfurt
Madrid Beijing
Milan
Tokyo
Shanghai
Mexico City
Sao Paulo
Johannesburg Sydney
Buenos Aires
Sources: CSS data, AWT, Moody’s Database Rated debt (excluding US)
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 5Rating Universe: A Wide Array of Public
Entities
Two big families: 337 RLGs, 162 GRIs
Regions
Provinces
RLGs States
337 Cities
Transportation
Higher Education
Water
Housing Association
GRIs Utilities
Healthcare
162
Specialized Lenders
Financial Institutions
Not for Profit
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 6RLG Ratings Universe by Geography
Credits spread over 44 countries
Australia
» Strong presence in Canada and Mexico,
South
and Asia America
W.Europe & CEE/CIS
Africa
Western
» Issuer ratings dominant vs. debt ratings,
Europe
capital mkt activity limited in many countries
» National Scale Ratings widely used in
Mexico, CEE/CIS, South Africa and Turkey
North » Africa coverage is limited to South Africa
America
Eastern
Europe
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 7List of rated RLGs in South Africa
South African Rated Sub-Sovereigns
(as at March 2018)
Outlook Global Scale National Scale Rating
METROPOLITAN MUNICIPALITIES
City of Cape Town Negative Baa3/P-3 Aaa.za/P1-za [1]
Ekurhuleni Metro Stable Baa3/P-3 Aaa.za/P-1.za [1]
Johannesburg Stable Baa3/P-3 Aa1.za/P-1.za [1]
Nelson Mandela Metro Stable Baa3 Aaa.za
City of Tshwane Stable Ba2/NP A1.za/ P-1.za
Mangaung Stable Ba2/NP A1.za/P-1.za
LOCAL MUNICIPALITIES
Rustenburg Stable Ba2 A1.za
Bergrivier Stable Ba3/NP Baa1.za/P-2.za
Breede Valley Stable Ba2/NP A2.za/P-1.za
City of Umhlathuze Stable Ba2 A1.za
DISTRICT MUNICIPALITIES
Amathole District Stable Ba1 A2.za
GOVERNMENT RELATED ISSUERS (GRI’S)
City Power Johannesburg Stable Baa3 Aa1.za
East Rand Water Care Company (ERWAT) Stable Ba1 Aa3.za
Ratings Under
South African National Roads (SANRAL) Ba1/NP Aa3.za/P-1.za
Review
Notes: [1] Issuer and debt ratings.
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 9List of Metros and Secondary Cities
Metropolitan municipalities have large
revenue base
Total Revenue - 2017 Total Revenue - 2017
Metropolitan Municipalities Province (ZAR million) ($ million)
Buffalo City Metropolitan Municipality Easter Cape 6,276 483
City of Cape Town Western Cape 38,404 2,954
City of Ekurhuleni Gauteng 31,457 2,420
City of Johannesburg Gauteng 45,422 3,494
City of Tshwane Gauteng 30,401 2,339
Ethekwini Metropolitan Municipality Kwazulu Natal 33,539 2,580
Mangaung Metropolitan Municipality Free State 5,767 444
Nelson Mandela Bay Metropolitan Municipality Easter Cape 9,802 754
Source: National Treasury & issuers’ financials
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 11Metros’ population growth rate from
2011 – 2016 continue to exert spending
pressure
FREE STATE: GAUTENG:
Mangaung 2% Ekurhuleni 6%
Johannesburg 12%
Tshwane 12%
KWAZULU NATAL:
eThekwini 6%
EASTERN CAPE:
WESTERN CAPE:
Buffalo City 7%
Cape Town 7% Nelson Mandela
Bay 10%
Source: Statistics South Africa
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 12Secondary cities largely depend on
transfers for capital infrastructure
Total revenue - 2017 Total revenue- 2017
Secondary cities Province (ZAR million) ($ million)
Emfuleni Gauteng 5,584 429
Msunduzi Kwazulu Natal 4,576 352
Rustenburg North West 4,277 329
Polokwane Limpopo 3,114 240
uMhlathuze Kwazulu Natal 3,007 231
Mogale City Gauteng 2,585 199
Mbombela Mpumalanga 2,587 199
Emalahleni Mpumalanga 2,470 190
Matlosana North West 2,402 185
Matjhabeng Free State 2,254 173
Sol Plaatje Northern Cape 1,905 147
Madibeng North West 1,879 145
Drakenstein Western Cape 1,883 145
Newcastle Kwazulu Natal 1,750 135
Govan Mbeki Mpumalanga 1,665 128
George Western Cape 1,643 126
Steve Tshwete Mpumalanga 1,449 111
Stellenbosch Western Cape 1,519 117
Tlokwe North West (2016 AFS) 1,270 98
Source: National Treasury, issuers’ financials
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 13Population growth rate from 2011 –
2016 also exert spending pressure for
secondary cities
NORTH-WEST: LIMPOPO:
Rustenburg 14%
Polokwane 12%
Matlosana 5%
Tlokwe 10% GAUTENG:
Madibeng 12% Emfuleni 2%
Mogale City 6%
NORTHERN CAPE:
MPUMALANGA:
Sol Plaatje 3%
Mbombela 6%
Emalahleni 15%
WESTERN CAPE:
Drakenstein 12% Govan Mbeki 15%
George 7% Steve Tshwete 21%
Stellenbosch 11% KWAZULU NATAL:
Msunduzi 10%
FREE STATE: uMhlathuze 11%
Matjhabeng 6% Newcastle 7%
Source: Statistics South Africa
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 14Moody’s RLGs Rating Approach
RLGs: The Approach
RLGs are “enduringly linked” to their respective sovereign.
1 The sovereign’s credit quality will to some extent anchor the
credit quality of the RLG
Sovereign and Sub-Sovereigns are likely to be affected by
2 similar external factors. Sub-Sovereigns do not posses
special autonomous characteristics that insulate them from
sovereign-related risks
Sub-sovereign issuers tend to be highly exposed to the same
3 macroeconomic and financial sectors pressures which affect
the central government.
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 16How sovereign credit quality affects
other ratings
Slower economy
Slowing or contracting economic Austerity measures
activity can have wide-ranging
consequences Defensive sovereign actions may include
austerity measures which reduce or delay
government payments
Financing costs
Liquidity constraints and higher Exchange and interest rates
financing costs resulting from Unfavourable changes to exchange rates, interest rates
diminished investor confidence or price levels
Regulation Political uncertainty
Government interference or
Increased risk of political uncertainty and
changes in regulation
civil or labour unrest
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 17Rating Approach:
BCA and Extraordinary Support
F1. Economic Fundamentals
F2. Institutional Framework
Operating Environment Extraordinary
F3. Financial performance & Debt profile (typically reflected in
Support Range
F4. Governance & Management Sovereign bond rating)
Assessment of Assessment of
idiosyncratic risk systemic risk
Baseline Credit Assessment
RLG Rating
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 18Assessing Idiosyncratic Risk
Financial performance Governance
Economic Institutional
& &
Strength Strength Debt profile Management
Idiosyncratic Risk
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 19Assessing Idiosyncratic Risk
Financial performance Governance
Economic Institutional
& &
Strength Strength
Debt profile Management
Why it matters
An RLG's ability to service its debt depends on, among other factors, the sufficiency
and reliability of its future revenues. Relative economic performance will likely impact
an RLG’s ability to generate own-source revenues and its dependence on fiscal
transfers. In general, a relatively wealthier region would have a more productive tax
base and could therefore generate necessary own-source revenues more readily.
How it’s measured in the scorecard
» Regional GDP per capita as a percentage of national GDP per capita
» Economic volatility is assessed by evaluating an RLG’s economic diversity
Idiosyncratic Risk
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 20Assessing Idiosyncratic Risk
Financial performance Governance
Economic Institutional
& &
Strength Strength
Debt profile Management
Why it matters
The institutional framework encompasses the arrangements that determine intergovernmental
relations and shape RLG powers and responsibilities. This factor addresses the RLG's public-
policy responsibilities and the adequacy of its fiscal powers to meet them. It also addresses
the way in which these responsibilities and powers may be altered, whether by a higher tier
entity or by the RLG itself.
How it’s measured in the scorecard
» We gauge predictability, stability and responsiveness by assessing whether and how RLG
powers and responsibilities may be altered in response to changing circumstances.
» We gauge financial flexibility by evaluating own-source revenue flexibility and the RLG
sector's spending flexibility
Idiosyncratic Risk
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 21Assessing Idiosyncratic Risk
Financial performance Governance
Economic Institutional
& &
Strength Strength
Debt profile Management
Why it matters
Financial performance is the product of accumulated decisions of policy makers regarding an
RLG’s revenue structure and expenditure base, as well as the economic environment in
which the government operates. The government's debt profile includes the amount of debt,
the burden it poses, its structure and composition, as well as past trends and future
borrowing needs – all important determinants of credit quality.
How it’s measured in the scorecard
» Ratio of gross operating balance to operating revenue
» Ratio of interest payments to operating revenue
» Cash and liquidity management
» Debt burden
» Debt structure
Idiosyncratic Risk
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 22Assessing Idiosyncratic Risk
Financial performance Governance
Economic Institutional
& &
Strength Strength
Debt profile Management
Why it matters
Our assessment of a government's credit standing includes an assessment of the
quality of financial decision-making and execution with a review of the government
structure, financial management practices and the transparency of financial
disclosures.
How it’s measured in the scorecard
We evaluate each RLG’s:
» Risk controls and financial management practices.
» Investment and debt management policies and practices
» Transparency and disclosure practices
Idiosyncratic Risk
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 23Assessing Extraordinary Support
Baseline Credit Assessment Extraordinary Support
Extraordinary support is defined as the likelihood that a higher-tier government would
aid an RLG in the event that it faced acute liquidity stress or act in such as way as to
help avoid a default of its debt obligations. Support could take different forms, for
example, a one-time cash infusion or any action facilitating negotiations with lenders
that enhances access to interim financing for the RLG.
RLG Rating
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 24Introduction of Ranges for Support
» Consistent with the support ranges for government-related issuers, we
have refined our support classifications into five ranges: low (0% -
30%), moderate (31% - 50%), strong (51% - 70%), high (71% - 90%)
and very high (91% - 100%).
» To arrive at a decision concerning the degree of support, we consider
factors within three main areas:
– Institutional framework;
– Historical behaviour; and
– Individual characteristics.
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 25Summary Idiosyncratic Risk Scorecard
and Weights
Scorecard Sub-factor weighting Factor weighting
1. Economic fundamentals 20%
1.1 Economic strength 70%
1.2 Economic volatility 30%
2. Institutional framework 20%
2.1 Legislative background 50%
2.2 Financial flexibility 50%
3. Financial performance and debt profile 30%
3.1 Operating margin 12.5%
3.2 Interest burden 12.5%
3.3 Liquidity 25%
3.4 Debt burden 25%
3.5. Debt structure 25%
4. Governance and management MAX 30%
4.1 Risk controls and financial management
4.2 Investment and debt management
4.3 Transparency and disclosure
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 26Rating process: in five steps to the first
time rating
Moody’s provides agenda and
1. Informal talk with 2. Formalisation of the information requirements for
face-to-face meeting
Moody’s rating mandate
3. Formal rating meeting
with Moody’s
5. Issuer notification on 4. Analysis and rating
assigned rating and decision on the basis of Feedback in advance of
potential publication the committee vote the Rating Committee
Regional and Local Governments (RLGs) Moody’s Approach, June 2018 27Daniel Mazibuko Sebastien Hay Mauro Crisafulli
Associate Lead Analyst Senior Vice President / Manager Associate Managing Director
+271.1217.5481 +349.1768.8222 +3902.9148.1105
daniel.mazibuko@moodys.com sebastien.hay@moodys.com mauro.crisafulli@moodys.com
moodys.comThis publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action
information and rating history.
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