Regional and Local Governments (RLGs) Moody s Approach

Transcription

1 Regional and Local Governments (RLGs) Moody s Approach SALGA Municipal Innovative Infrastructure Financing Conference JUNE, 2018

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3 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

4 Moody s Sub-Sovereign Group

5 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 Mexico City Toronto New York Stockholm Moscow London Paris Prague Madrid Frankfurt Milan Beijing Tokyo Shanghai Sao Paulo Buenos Aires Johannesburg Sydney Sources: CSS data, AWT, Moody s Database Rated debt (excluding US) Regional and Local Governments (RLGs) Moody s Approach, June

6 Rating Universe: A Wide Array of Public Entities Two big families: 337 RLGs, 162 GRIs 337 RLGs Regions Provinces States Cities 162 GRIs Transportation Higher Education Water Housing Association Utilities Healthcare Specialized Lenders Financial Institutions Not for Profit Regional and Local Governments (RLGs) Moody s Approach, June

7 RLG Ratings Universe by Geography Credits spread over 44 countries Africa Australia and Asia South America Western Europe» Strong presence in Canada and Mexico, W.Europe & CEE/CIS» Issuer ratings dominant vs. debt ratings, capital mkt activity limited in many countries» National Scale Ratings widely used in Mexico, CEE/CIS, South Africa and Turkey North America» Africa coverage is limited to South Africa Eastern Europe Regional and Local Governments (RLGs) Moody s Approach, June

8 List of rated RLGs in South Africa

9 South African Rated Sub-Sovereigns (as at March 2018) METROPOLITAN MUNICIPALITIES Notes: [1] Issuer and debt ratings. Outlook Global Scale National Scale Rating 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 South African National Roads (SANRAL) Ratings Under Review Ba1/NP Aa3.za/P-1.za Regional and Local Governments (RLGs) Moody s Approach, June

10 List of Metros and Secondary Cities

11 Metropolitan municipalities have large revenue base Metropolitan Municipalities Province Total Revenue (ZAR million) Total Revenue ($ million) Buffalo City Metropolitan Municipality Easter Cape 6, 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, Nelson Mandela Bay Metropolitan Municipality Easter Cape 9, Source: National Treasury & issuers financials Regional and Local Governments (RLGs) Moody s Approach, June

12 Metros population growth rate from continue to exert spending pressure FREE STATE: Mangaung 2% GAUTENG: Ekurhuleni 6% Johannesburg 12% Tshwane 12% KWAZULU NATAL: ethekwini 6% WESTERN CAPE: Cape Town 7% EASTERN CAPE: Buffalo City 7% Nelson Mandela Bay 10% Source: Statistics South Africa Regional and Local Governments (RLGs) Moody s Approach, June

13 Secondary cities largely depend on transfers for capital infrastructure Secondary cities Province Total revenue (ZAR million) Total revenue ($ million) Emfuleni Gauteng 5, Msunduzi Kwazulu Natal 4, Rustenburg North West 4, Polokwane Limpopo 3, umhlathuze Kwazulu Natal 3, Mogale City Gauteng 2, Mbombela Mpumalanga 2, Emalahleni Mpumalanga 2, Matlosana North West 2, Matjhabeng Free State 2, Sol Plaatje Northern Cape 1, Madibeng North West 1, Drakenstein Western Cape 1, Newcastle Kwazulu Natal 1, Govan Mbeki Mpumalanga 1, George Western Cape 1, Steve Tshwete Mpumalanga 1, Stellenbosch Western Cape 1, Tlokwe North West (2016 AFS) 1, Source: National Treasury, issuers financials Regional and Local Governments (RLGs) Moody s Approach, June

14 Population growth rate from also exert spending pressure for secondary cities NORTH-WEST: Rustenburg 14% Matlosana 5% Tlokwe 10% Madibeng 12% NORTHERN CAPE: Sol Plaatje 3% WESTERN CAPE: Drakenstein 12% George 7% Stellenbosch 11% FREE STATE: Matjhabeng 6% LIMPOPO: Polokwane 12% GAUTENG: Emfuleni 2% Mogale City 6% MPUMALANGA: Mbombela 6% Emalahleni 15% Govan Mbeki 15% Steve Tshwete 21% KWAZULU NATAL: Msunduzi 10% umhlathuze 11% Newcastle 7% Source: Statistics South Africa Regional and Local Governments (RLGs) Moody s Approach, June

15 Moody s RLGs Rating Approach

16 RLGs: The Approach 1 RLGs are enduringly linked to their respective sovereign. The sovereign s credit quality will to some extent anchor the credit quality of the RLG 2 Sovereign and Sub-Sovereigns are likely to be affected by similar external factors. Sub-Sovereigns do not posses special autonomous characteristics that insulate them from sovereign-related risks 3 Sub-sovereign issuers tend to be highly exposed to the same macroeconomic and financial sectors pressures which affect the central government. Regional and Local Governments (RLGs) Moody s Approach, June

17 How sovereign credit quality affects other ratings Slower economy Slowing or contracting economic activity can have wide-ranging consequences Financing costs Liquidity constraints and higher financing costs resulting from diminished investor confidence Regulation Government interference or changes in regulation Austerity measures Defensive sovereign actions may include austerity measures which reduce or delay government payments Exchange and interest rates Unfavourable changes to exchange rates, interest rates or price levels Political uncertainty Increased risk of political uncertainty and civil or labour unrest Regional and Local Governments (RLGs) Moody s Approach, June

18 Rating Approach: BCA and Extraordinary Support F1. Economic Fundamentals F2. Institutional Framework F3. Financial performance & Debt profile F4. Governance & Management Operating Environment (typically reflected in Sovereign bond rating) Extraordinary Support Range Assessment of idiosyncratic risk Assessment of systemic risk Baseline Credit Assessment RLG Rating Regional and Local Governments (RLGs) Moody s Approach, June

19 Assessing Idiosyncratic Risk Economic Strength Institutional Strength Financial performance & Debt profile Governance & Management Idiosyncratic Risk Regional and Local Governments (RLGs) Moody s Approach, June

20 Assessing Idiosyncratic Risk Economic Strength Institutional Strength Financial performance & Debt profile Governance & 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

21 Assessing Idiosyncratic Risk Economic Strength Institutional Strength Financial performance & Debt profile Governance & 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 publicpolicy 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

22 Assessing Idiosyncratic Risk Economic Strength Institutional Strength Financial performance & Debt profile Governance & 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

23 Assessing Idiosyncratic Risk Economic Strength Institutional Strength Financial performance & Debt profile Governance & 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

24 Assessing 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

25 Introduction 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

26 Summary 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

27 Rating process: in five steps to the first time rating 1. Informal talk with Moody s 2. Formalisation of the rating mandate Moody s provides agenda and information requirements for face-to-face meeting 3. Formal rating meeting with Moody s 5. Issuer notification on assigned rating and potential publication 4. Analysis and rating decision on the basis of the committee vote Feedback in advance of the Rating Committee Regional and Local Governments (RLGs) Moody s Approach, June

28 Daniel Mazibuko Associate Lead Analyst Sebastien Hay Senior Vice President / Manager sebastien.hay@moodys.com Mauro Crisafulli Associate Managing Director mauro.crisafulli@moodys.com moodys.com

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