Johannesburg, 11 March 2020 – GCR Ratings (“GCR”) has assigned the County Government of Makueni Issuer ratings of BBB(KE) and A3(KE) for the long and short term respectively, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|County Government of Makueni||Long Term Issuer||National||BBB(KE)||Stable Outlook|
|Short Term Issuer||National||A3(KE)|
The ratings reflect the County Government of Makueni’s (“Makueni County”) stable financial profile underpinned by the consistent transfers from National Government, as well as other ongoing operational and institutional support from National Government. This is counterbalanced by a weak entity profile, characterised by limited economic activity and significant infrastructural backlogs.
The ratings are supported by the stability afforded by the demonstrated consistent baseline of revenue from the National Government, which offset the County’s very low own source revenue (OSR) generation. Exchequer releases have increased by a cumulative average growth rate of 7.7% over the review period and GCR expects this growth rate to at least be maintained over the rating horizon. Note is also taken of initiatives that have been implemented to increase OSR, although this will not fundamentally change the revenue profile. Of concern, recurrent expenditure has continued to grow faster than the growth in total revenue driven by staff costs, with the staff cost to total revenue ratio increasing to 39.8% in FY17/18 (FY16/17: 34.7%). This is above the 35% limit recommended by the Public Finance Management Act (PFMA) 2012, albeit comparing favourably to other counties. As a result, the operating surplus has steadily declined over the review period, which could crowd out development capital expenditure and adversely affect the County’s ability to attract private investment and expand the tax base.
The ratings are constrained by the underlying weaknesses in the County’s economic profile. According to KNBS, 89% of the population lives in rural areas and depends on subsistence farming, while most land is freehold land which does not attract property rates. Poor access to social amenities, in particular water, significant infrastructure backlogs and limited commercial activity suggest both a low taxable base and sizeable proportion of the population in need of free services. That said, note is taken of the various catalytic projects being undertaken by the County that are aimed at increasing economic activity, and the enhancement of revenue collection function to support OSR growth.
Makueni County has not made use of debt funding since inception of the County Government, and thus has no debt service track record. However, the relatively timely settlement of trade creditors over the years suggests a sound track record of honouring payment obligations. Over the medium term, Makueni County is considering raising debt to finance development activity, with a number of projects already in pipeline. In this regard, note is taken of the safety net provided by the County’s debt management policy, which limits borrowings to a maximum of 20% of the prior year’s audited revenue in line with National Government regulations. Based on the County’s projected revenue and assuming the County raises debt up to this limit, GCR expects that any debt will be below KES2bn and credit protection metrics will remain comfortable, with interest coverage and debt service coverage above 35x and 10x respectively. That said, Makueni County’s OSR remains too low to support meaningful debt service coverage, indicating sustained reliance on National Government to support gearing.
As County governments operate on a cash basis, expenditure is only undertaken if there is sufficient cash resources available. Cash balances are only held at minimal levels and there are no unutilised funding facilities, which can give rise to liquidity concerns when there is insufficient cash to meet recurrent expenditure. This risk has been elevated in recent years by the periodic delays in transfers from the National Treasury. Nevertheless, Makueni County has consistently maintained sufficient liquidity over the period under review, with days cash on hand above 75 days in all years. The majority of this is held in ordinary revenue accounts, albeit that some relates to pending bills.
GCR has factored National Government support into the Makueni County ratings. This is because the County fulfils a critical social service, being at the forefront of improving the day-to-day quality of life for its citizens. Moreover, the National Government has demonstrated ongoing financial support for the Counties through regular transfers and grants, as well as substantial technical support through the various Government departments. That said, GCR notes that there are no explicit guarantees issued to financial or trade creditors, on behalf of the County, and the settlement of all financial obligations remains the responsibility of Makueni County. The extraneous financial support consideration is also somewhat curtailed by the constrained National fiscus.
Positive rating action is only likely in the long term, once the County achieves a meaningful improvement in operating performance that manifests in increasing OSR and greater levels of development expenditure. Conversely, negative rating cation may result from a weaker operating performance or deterioration in the county’s management and governance, particularly if this results in delays in meeting staff and supplier obligations.
|Primary analyst||Eyal Shevel||Sector Head: Public Sector Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Secondary Analyst||Tavonga Muchemedzi||Credit Analyst|
|Johannesburg, ZA||Tavongam@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Head of Group Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Local and Regional Governments, June 2019|
|GCR Country Risk Scores, January 2020|
|GCR Rating Scales, Symbols and Definitions, May 2019|
|Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial/last||National||BBB(KE)||Stable||March 2020|
|Short Term Issuer||Initial/last||National||A3(KE)|
Risk Score Summary
|Doubled country risk score||9.00|
|Sector risk adjustment||-1.00|
|Management and governance||0.00|
|Leverage and Capital Structure||2.00|
|Government support floor||2.00|
|Total Risk Score||8.00|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital Expenditure(“capex”)||Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Gearing||Gearing (or leverage) refers to the extent to which a company is funded by debt.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Loan||A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.|
|Local and regional Governments (“LRG”)||Government entities possessing revenue raising capacity that are responsible for the administration of public policy for a given jurisdiction. These include metropolitan councils, local municipalities (of all sizes), district councils and state governments.|
|Long term||See GCR Rating Scales, Symbols and Definitions.|
|Own Source Revenue||Own source revenue are those income streams that are directly under the control of the public entity, and may include property rates, business and other licence fees, hospitality fees, fines, or any other charges through which an LRG can generate income.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||See GCR Rating Scales, Symbols and Definitions.|
|Transfers||Income received from a third party, most often a higher level of government or a donor. Includes exchequer releases, income provided by Government Departments, and or external parties such as development finance agencies.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The credit rating has been disclosed to the County Government of Makueni. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
The County Government of Makueni participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from The County Government of Makueni and other reliable third parties to accord the credit rating included:
- Audited financial results County Government of Makueni 2017/2018 (Plus three years of comparative numbers);
- Budget reports up to 2020/2021; and
- The County Integrated Development Plan 2018-2022.
- County Governments Act 2012
- Public Financial Management Act 2012
- Gross County Product Report 2019.