Moody's said the three-notch downgrade reflects the Free State 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.

Last month, the cash-strapped municipality also had water restrictions imposed by Bloem Water due to nonpayment of water bills.

The rating agency said liquidity pressures in Mangaung reflect a combination of weak local governance, which exacerbates collection issues, and poor effectiveness of the recovery plan with the central government.

According to the 2019 preliminary results, Mangaung's cash and cash equivalent declined to R131 million from R289 million in the previous year, prompting the municipality to request a delay in honouring some of its financial obligations.

Mangaung's administration has requested an extension from its banks to delay payment of its loans by seven days, instead of paying on the due date, which was 30 June 2019.

The extent of the downgrade reflects Moody's prior expectation that there would be more effective measures and communication between Mangaung and the central government both to address collection problems and to provide any additional support necessary, which did not materialise.

Moody's said the continuous decline in the city's cash and cash equivalents balances was a result of poor collection rates from consumer debtors. Consumer debtors increased to R2.8 billion, from R1.3 billion in 2018, despite efforts to collect revenue through their financial recovery plan.

"In Moody's view, the financial recovery plan that the municipality developed with the central government in July 2018 has so far not been successful in improving Mangaung's overall liquidity position," Moody's said.

"Although the municipality conducted a comprehensive analysis of both trade debtors and trade payables, only R192 million of old debt was collected from government departments from July 2018 to May 2019.

"As at 30 June 2019, the metro was owed a total of R4.1 billion, of which 36 percent was owed by business and government, while 64 percent was from residential and other debtors."

The ratings agency said the municipality had not yet implemented changes recommended by the National Treasury for its 2019 budget, which would likely result in an under-funded budget for 2019/20 financial year.

Moody's said the negative outlook reflects the uncertainty over whether Mangaung will succeed in improving its financial performance and liquidity profile over the next 12-18 months to prevent further deterioration.

African News Agency (ANA)