Moody’s Investors Service has placed Mangaung Metropolitan Municipality’s rating three notches deeper into “junk” territory because its “rapidly declining liquidity position” means a default on debt repayments is likely.

SA’s public finances have been deteriorating in recent years at both a national and local-government level. In July, GCR Ratings placed the City of Johannesburg’s credit rating on a negative outlook, citing concerns about the city’s liquidity position.

Mangaung, which governs Bloemfontein in the Free State, came up with a financial recovery plan together with the national government a year ago. But according to Moody’s, that plan has not delivered results.

The ratings agency said late on Tuesday night it had downgraded the long-term rating of the municipality to B3 from Ba3, with a negative outlook.

A B3 rating means the municipality’s debt is considered speculative and subject to high credit risk.

“The three-notch downgrade reflects the municipality’s weak and rapidly declining liquidity position, which recently led to a failure to service commercial bank debt on time, implying a relatively high probability of default in future,” Moody’s said.

The liquidity pressures reflected “weak local governance”, which exacerbated revenue-collection issues, “and poor effectiveness of the recovery plan with the central government”.

Moody’s had previously expected more effective measures and communication between Mangaung and the central government to tackle the issues, but this never materialised, it said.

Mangaung had cash and cash equivalents of just R131m at the end of the 2019 financial year, from R289m previously.

Its cash shortage prompted the municipality to ask for a delay in debt payments, Moody’s said.

At the end of June 2019, the metropolitan was owed R4.1bn, of which 36% was owed by business and government and 64% was owed from residential and other debtors.

“In Moody’s view, poor revenue collection rates reflect the municipality’s weak governance and management practices,” said the agency.

hedleyn@businesslive.co.za