Moody’s Elevates Cape Town’s Credit Rating, Nearly Matching Sovereign

Moody’s Investors Service has elevated the City of Cape Town’s long-term local-currency issuer rating from Ba3 to Ba2, bringing it just one notch below South Africa’s sovereign rating of Ba1. This milestone reflects Cape Town’s disciplined financial governance, robust liquidity, and a cautiously improving economic outlook—despite the broader challenges facing the national economy (Engineering News, Cape Town Resource).

Upgrade Details

On 2 May 2025, Moody’s formally approved the upgrade, simultaneously affirming a stable outlook for the Metropolitan Municipality. The agency also:

• Upgraded Cape Town’s Baseline Credit Assessment (BCA) to ba2 (from ba3).
• Elevated the city’s national-scale long-term issuer and senior unsecured ratings to Aa2.za (from Aa3.za).
• Confirmed short-term global and national ratings at NP and P-1.za, respectively (Cape Town Resource).

Moody’s noted that Cape Town’s consistent operating surpluses, strong liquidity position, and low debt metrics underpin its upgraded profile. Importantly, Moody’s indicated that should South Africa’s sovereign rating improve, Cape Town could see a parallel upgrade—underscoring the municipality’s credit strength relative to the nation.

Financial Performance and Key Metrics

The upgrade is supported by Cape Town’s sustained operating performance over recent years, even within a low-growth environment. Key indicators from Moody’s detailed report include:

Source: Moody’s Ratings; City of Cape Town (Cape Town Resource)

These metrics illustrate Cape Town’s ability to generate sizeable operating surpluses—driven by a 98% service-charge collection rate in fiscal 2024—and to maintain liquidity cushions exceeding 20% of revenues, even as the city plans significant capital expenditure (Cape Town Resource).

Revenue Collection and Prepaid Electricity Meters

A cornerstone of the city’s improved cash flow has been the rollout of prepaid electricity meters across residential and commercial properties. By enabling consumers to purchase electricity in advance, Cape Town has dramatically reduced arrears, improving its service-charge collection from around 93% in 2021 to nearly 98% in 2024 (Cape Town Resource).

“Our prepaid meter programme has not only ensured healthier municipal finances but also given residents more control over their energy usage,” said Mayor Geordin Hill-Lewis in a recent interview.

This proactive approach contrasts with numerous South African municipalities that struggle with escalating utility debts and costly debt-recovery efforts. The enhanced payment culture in Cape Town has provided predictable revenue streams, allowing for both operational stability and strategic reinvestment in capital projects (CNBC Africa).

Infrastructure Investment and Climate Resilience

Cape Town has committed to an R39.5 billion infrastructure programme over the next three years, focusing on critical services that support both economic growth and climate resilience:

• Water and Sanitation: Upgrades to bulk water supply, desalination plants and sewage-treatment works to secure water resources amid recurrent droughts.
• Electricity: Modernization of substations, expansion of renewable-energy integration and continued roll-out of prepaid meters.
• Transport: Investment in bus-rapid-transit corridors and non-motorized-transport lanes to ease congestion and reduce carbon emissions.
• Climate Adaptation Projects: Coastal defences, stormwater-management systems and urban-greening initiatives to mitigate flood risks and heat islands.

These projects are expected to generate approximately 130,000 direct jobs in construction and related industries, providing a critical buffer against South Africa’s high national unemployment rate, which stood at 32.6% in Q1 2025 (Reuters).

Implications for Borrowing Costs and Investor Confidence

With the upgraded Ba2 rating, Cape Town’s borrowing costs are poised to decline. Interest-rate differentials on municipal bonds typically move in tandem with rating changes, meaning the city can now tap the capital markets at more favorable spreads—potentially saving tens of millions of rand in interest expenses over the life of new debt issuances (Engineering News).

“This upgrade sends a powerful signal to global and domestic investors that Cape Town is a stable, well-managed credit,” noted Hendrik Basson, a fixed-income analyst at FirstRand Bank.

Enhanced investor confidence may also broaden the investor base, attracting pension funds, insurance companies and green-bond investors keen on financing sustainable infrastructure. In turn, the city can accelerate its capital-works agenda without overburdening ratepayers or compromising service delivery (Sharenet).

Economic Context: South Africa vs. Cape Town

South Africa’s sovereign rating has hovered at Ba1 since Moody’s affirmed it in December 2024, citing a resilient financial sector and nascent policy reforms under the new government (Reuters). However, national growth has remained subdued—projected at 1.2% for 2025—amid structural challenges such as load-shedding, labor disputes and fiscal constraints.

Against this backdrop, Cape Town stands out for its relative fiscal discipline and diversified revenue base:

• Own-revenue generation: Over 82% of the city’s operating revenue comes from local rates, service charges and user fees, compared to a national average of around 60% for large metros.
• Low dependency on grants: Intergovernmental transfers account for just 16% of operating revenue, down from 18.7% in 2021.
• Prudent debt management: Net direct and indirect debt remains below 16% of operating revenues, well under Moody’s upgrade threshold of 25%.

These contrasts underscore why Cape Town can maintain a credit profile only marginally below the national sovereign—while many other municipalities face higher credit-risk premiums due to weaker governance and revenue-collection challenges (Cape Town Resource).

Looking Ahead: Outlook and Risks

Moody’s stable outlook reflects expectations that Cape Town will sustain its strong operating margins (projected at 10.1% in fiscal 2025 and 2026) and moderate debt metrics for the next 12–18 months. Yet several risks merit close monitoring:

1. Economic Slowdown: A sharper-than-expected contraction in the South African economy—stemming from further rolling blackouts or global trade disruptions—could suppress property markets and consumer spending, denting service-charge revenues.
2. Fiscal Pressures: Any substantial tax-relief measures or unplanned subsidies could erode operating surpluses and pressure the city’s liquidity buffer.
3. Liquidity Shocks: Although Cape Town maintains a cash and equivalents ratio above 20% of annual revenues, prolonged global credit tightening could limit its ability to roll over short-term debt.
4. Sovereign Risk Spillovers: A downgrade of South Africa’s sovereign rating would automatically cascade to Cape Town, given the municipality’s near-sovereign status in Moody’s framework (Cape Town Resource).

To mitigate these risks, Cape Town’s leadership has emphasized conservative budgeting, regular stress-testing of its balance sheet, and continued diversification into non-residential revenue streams—such as events, tourism levies and strategic public-private partnerships (CNBC Africa).

Humanizing the Numbers: Voices from Cape Town

“This upgrade is not just about numbers on a rating sheet,” reflects Mayor Geordin Hill-Lewis. “It’s about families who rely on stable services, businesses that need reliable power, and young people seeking jobs in our construction sites and clean-energy plants.”

Local small-business owner Nomfundo Mbatha echoes this sentiment: “Knowing the city can borrow more cheaply means they can fix crumbling roads and upgrade our community centers, so we don’t have to travel miles for basic services.”

Such everyday perspectives remind us that credit-rating actions ripple through communities—fueling infrastructure that powers homes, schools and clinics, and underpinning the social contract between city hall and its citizens (Moneyweb).

Conclusion

Moody’s decision to raise Cape Town’s credit rating from Ba3 to Ba2—paired with a stable outlook—affirms the municipality’s proactive stewardship of public finances, robust revenue-collection strategies, and forward-looking infrastructure investments. By aligning its rating within striking distance of the national sovereign, Cape Town gains a potent advantage: lower borrowing costs, heightened investor confidence, and the fiscal agility to tackle pressing challenges such as climate resilience, service-delivery backlogs, and job creation.

Yet sustained success will require vigilance against external shocks, disciplined execution of capital programmes, and deepening community engagement. If Cape Town continues on its current path, it will not only safeguard its financial footing but also serve as a beacon for other municipalities striving to blend economic vitality with social progress.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

16th May, 2025