PART 2 SUPPORTING DOCUMENTATION
2.5 OVERVIEW OF BUDGET ASSUMPTIONS
Key factors that have been taken into consideration in the compilation of the 2020/21 MTB include:
• National Government macro-economic targets;
• The general inflationary outlook and the impact on City’s residents and businesses;
• The impact of municipal cost drivers;
• The increase in prices for bulk electricity and water; and
• The increase in the cost of remuneration.
2.5.1. External factors
The global economic growth has been on a downward trajectory amid trade tensions notably between the United States and China. This resulted in a slowdown in global trade, which recorded growing a mere 1 per cent growth in 2019. The world economy is expected to grow by an average of 3.4% over the medium term, lower than the 3.8% average growth between 2010 and 2018. It is envisaged that improved growth in developing countries will support recovery over the long term. However, the aggregate growth forecast for South Africa’s main trading partners has been revised downwards over the medium term (NT, 2020: Budget Review).
The economic growth outlook for South Africa is also subdued. The National Treasury highlights the financial status of state- owned entities; unreliable power supply; policy inertia and slow implementation of reforms as risk factors in the unfavourable economic growth outlook. Real GDP slowed from 0.8 per cent in 2018 to a projected 0.3 per cent in 2019. Accordingly, real GDP growth forecast has been revised downwards to 1.3 per cent over the medium term. (NT, 2020: Budget Review).
For municipalities, growth in economic activity positively impacts on the revenue base, the ability of municipalities to generate and collect revenue to fund the much needed development programmes intended to improve the lives of residents.
2.5.2. General inflation outlook and its impact on the municipal activities
Inflation, as measured by the CPI, has remained within the target range of the South African Reserve Bank since the beginning of 2018. Inflation averaged 4.7 and 4.1 per cent in 2018 and 2019 respectively. (Statistics South Africa, CPI Publications).
In its Monetary Policy Statement of January 2020, the South African Reserve Bank (SARB) lowered its medium term inflation outlook. The Bank’s forecasts of inflation average 4.1% in 2019 (down from 4.2%), 4.7% for 2020 (down from 5.1%) and 4.6% for 2021 (down from 4.7%).
Inflation increases the cost of living of households and thereby increases the vulnerability of low and middle income groups and negatively affects their ability to pay for municipal services. This negatively impacts the
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revenue generation and revenue collection rates of municipalities and consequently their ability to fund the planned programmes.
The City is projecting CPI at 5.2% for 2020/21, 4.7% for 2021/22 and 5.0% for 2022/23 financial years.
2.5.3. Interest rates for borrowing and investment of funds
The MFMA specifies that borrowing can only be utilised to fund capital or refinancing of borrowing in certain conditions. The City engages in a number of financing arrangements to minimise its interest rate costs and risk.
There are a set of risk management and liability matching activities undertaken by the City’ treasury, and political guidance is required if there is a need for review. The FDP further incorporates the ratios prescribed by the National Treasury through Circular 71 and requirements specific to covenant, and therefore, serves as a regulatory instrument in managing the City’s overall capital structure at group level.
Borrowing will be R2.6 billion in the 2020/21 budget year and will increase to R3 billion in the outer year. For the 2020/21 MTB interest on loans is projected to be 9.8%, 9.9% and 10.0% for the respective years.
2.5.4. Collection rate for revenue services
The rate of revenue collection is currently expressed as a percentage of annual billings. For the medium-term, collection rates for the various services are assumed as follows:
The overall budgeted collection rate is 91.6% for 2020/21, 91.7% for 2021/22 and 91.8% for the outer years.
2.5.5. Salary increases
The SALGBC’s multi- year collective agreement of 15 August 2018 stipulates that for the 2020/21 financial year the increase in salaries shall be based on the projected average CPI percentage for 2019 plus one comma five percent (1.5%). The forecasts of the South African Reserve Bank, in terms of the January 2020 Monetary Committee Statement shall be used to determine the projected CPI. The same procedure is followed to determine the salary increases for 2021/22 and 2022/23 financial years, with an additional 1.25% to the projected CPI.
Accordingly, the City is budgeting for a salary increase of 6.25% for 2020/21 and 6.3% for both 2021/22 and 2022/23 financial years.
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2.5.6. Bulk purchases
Electricity bulk purchases from Eskom and Kelvin Power station are assumed to increase by 7.3 per cent and the cost of bulk purchases from Rand Water is expected to increase by 6.6 per cent for the 2020/21 financial year.
Finance charges are increasing by 3.3 per cent and other expenditure categories have been limited below CPI with the aim of implementing operational efficiencies.
Credit rating
The credit rating review by Moody’s Investor Service of 11 November 2019 downgraded the City’s long-term issuer rating to Baa3 negative. This negative outlook on the City’s credit profile is attributed to the negative outlook of the country- which is its supporter- given the operational and financial links between the two.
Moody’s review further alludes to the City’s high infrastructure backlog and rapid population growth, which strain its capital infrastructure plans, as contributing factors to the negative credit outlook.
A negative credit rating is detrimental to the City’s efforts to attract investments to fund its high capital spending plan. However, the City’s improving operating performance, improving liquidity, sophisticated financial management and the large and diversified economic base are highlighted as credit strengths.
2.5.7. Ability of the municipality to spend and deliver on the programmes
It is estimated that a spending rate of at least 100 per cent is achieved on operating expenditure and 100 percent on the capital programme for the 2020/21 MTB of which performance has been factored into the cash flow budget.
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