Moody's Investors Service has placed the ratings of 11 South African regional and local governments' (RLGs) and three government-related entities' (GRIs) under review on Sunday for possible downgrade.
In addition, Moody's has changed to negative from stable the outlooks on the ratings of two municipalities.
Moody's said these steps were prompted by the potential deterioration of SA's credit profile as captured by Moody's recent decision to put the country's Baa2 government bond rating on review for downgrade. The ratings agency pointed to the close operational and financial linkages between the national government and municipalities, illustrating the centralised nature of the local public sector.
"Large cities are exposed to the country's macroeconomic performance and socio-economic conditions to varying degrees, while small- to medium-sized municipalities are highly reliant on government transfers for operations and capital investments," explained Moody's.
While metropolitan cities rated by Moody's have comparatively rich economic bases, sound financials and good governance practices, Moody's expects that the weaker-than-anticipated economic growth prospects in the medium-term will put pressure on their overall financial performances.
Moody's also anticipates that these large cities - which together account for well over 25% of the SA's population - will continue to register high demand for welfare benefits and infrastructure. In addition, they feature moderate-to-high debt levels, which add rigidity to their budgets.
Similar to metropolitan cities, local municipalities are exposed to SA's deteriorating economic environment through lower revenue growth, but are also highly exposed to government transfers allocations.
Moreover, volatile budget results from less sophisticated budget planning are seen as a major factor behind most of the ratings being lower than those of metropolitan cities.
Moody's has placed the ratings of the East Rand Water Care Company (Erwat) and City Power Johannesburg under review for possible downgrade, mirroring changes in the credit profile of their respective parent municipalities, namely the City of Ekurhuleni and the City of Johannesburg.
The ratings of the SA National Roads Agency (Sanral) have also been placed under review for possible downgrade. According to Moody's this reflects its exposure to SA's deteriorating economic environment. Moody's also expects that infrastructure spending requirements and weak cash flows will continue to put pressure on Sanral's finances.
Moody's anticipates that the conclusion of the review of a possible downgrade of SA's sovereigh ratings would likely be mirrored in the conclusion regardig the so-called sub-sovereigns.
The two municipalities whose outlook has been changed from stable to negative are Bergrivier and uMgungundlovu, due to the economic environment having deteriorated further since the December rating and may erode their financial results.
"A further weakening of the South African sovereign credit profile could lead to downward adjustments in the ratings of RLGs and government-related companies. Additionally, financial difficulties resulting in cash-flow pressures and consistently high or growing debt levels could lead to downward rating actions independent of sovereign rating movements," Moody's explained.
"Upward rating pressure to the ratings of RLGs and government-related companies could result from the strengthening of the sovereign credit profile. Evidence of a given entity's ability to display comparatively stronger credit fundamentals and an ability to withstand the deterioration of the operating environment could also exert upward rating pressure."
Other entities being placed on review for a downgrade include, the District Municipality of Amathole, the Breede Valley Municipality, the City of Cape Town, the Metropolitan Municipality of Ekurhuleni, the City of Johannesburg, the Municipality of KwaDukuza, the Municipality of Mbombela, the Nelson Mandela Metropolitan Municipality, the Municipality of Rustenburg and the City of Tshwane.