Eskom's tariff hikes will increase the liquidity problems of South African municipalities, and credit downgrades await municipalities that do not improve debt collection, warns international rating agency Moody's. A statement from Moody's on Thursday said that the agency did not expect immediate consequences for the 24 municipalities in South Africa that it rates, but downward pressure on ratings could follow later for bond issuers that did not maintain proper debt collection or effectively manage rising expenditure.
The agency points out that Eskom's tariff hikes of 24.8% this year, 25.8% next year and 25.9% in 2012 will have a direct impact on the municipalities' financial affairs.
They will have to spend more to buy electricity, and pass the higher costs on to consumers. This will cause problems with revenue collection - a core focus area for credit analysis in this industry, warns Moody's.
Municipalities' efforts to pass the tariff increases on to consumers will possibly not exactly lead to higher cash flows. Consumers in the lower income groups could have real difficulty in affording the higher tariffs. Moody's nevertheless expects the bad debts and write-offs of uncollectibles to increase.
Nevertheless, the agency has maintained its negative rating for Eskom. Last year it gave Eskom a rating of Baa2 for senior unsecured debt.