Joburg's debt reckoning: Giulietta Talevi

In this interview with Irakli of BizNews, Currency co-founder Giulietta Talevi unpacks the April 23 letter from Finance Minister Enoch Godongwana to Joburg Mayor Dada Morero, which laid bare the city's "shocking" financial picture: just R3.9bn in cash against R25bn owed to creditors. "Technically, you would say that it's bankrupt now, and cannot afford an excessively expensive wage deal," Talevi says of the R10.3bn SAMWU agreement at the heart of the dispute. She explains why Moody's downgrade watch is really about governance — not just numbers — pointing out that the city's failure to produce its audited financial statements "indicates serious deterioration in governance, and not just Joburg's financial health." Two deadlines loom: audited financials owed to the JSE by May 31, and a R1.4bn bond repayment due June 22. Talevi explains that because the debt is unsecured, all creditors "are treated equally" — meaning a single default event could trigger every lender to call in their loans simultaneously. She also raises the spectre of moral hazard, citing Chartis Asset Management's Ian Scott on what he calls a "treasury-funded put" — the idea that bailing out Joburg signals to leadership that they "can mess up, you can collapse the financial situation of the country's biggest Metro… and we'll bail you out because you're too big to fail." When Irakli draws a parallel to the e-toll saga, Talevi agrees taxpayers are "on the hook again" — paying their taxes only to face additional costs for the basic services those taxes were meant to fund.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..Watch here.Listen here.Read Giulietta's piece in full below.Why Godongwana had to rebuke Morero on Joburg’s debt crisis Joburg is on review for a downgrade to its debt rating, but a letter from finance minister Enoch Godongwana makes clear that the city’s finances are in even worse shape than feared..By Giulietta Talevi for Currency News.For some time, Ian Scott, a portfolio manager at Chartis Asset Management, has been arguing that the bond market has Joburg badly wrong. The city’s finances, in his view, are far worse than the ratings agencies and fixed-income investors are pricing – and Joburg’s debt should be trading much deeper into junk than it currently does.Finance minister Enoch Godongwana is effectively agreeing with him.In a letter to Joburg mayor Dada Morero dated April 23 and reported by Bloomberg and Daily Maverick, Godongwana slams the ANC-appointed mayor for “illegally” signing a R10.3bn wage agreement with the South African Municipal Workers’ Union. “You very well know this city can’t afford this agreement,” the minister told him.Joburg’s creditors are owed R25.2bn – a 48% jump from the R17bn outstanding at the end of the 2022/23 financial year – against cash and cash equivalents of just R3.9bn. “This is a marker of severe financial distress,” Godongwana points out in his letter. In other words, the city doesn’t have enough cash to pay its debt and, as a result, the National Treasury will withhold roughly R8bn – close to 10% of the city’s annual budget – unless the pay deal is reversed.The municipal union has shown no signs of backing off either, saying in March that the wage pact is an effort to correct long-standing salary disparities and threatening service delivery against a legal challenge brought by the DA.For Scott, none of this is a surprise. “The question the bond market has had for quite a while, except for the city of Cape Town, is, of all these municipalities, which one is going to default first?” he tells Currency.Last instalmentJoburg’s bonds due in June this year were trading at a yield of about 11.45% before they were suspended by the JSE at the end of March, after the city failed to submit its annual financial statements for the year ended June 30 2025. That’s a spread of about 2.25 percentage points, or 225 basis points, over 10-year national government debt. The metro has to repay R1.44bn next month, the last instalment of a 2016 debt programme.Tshwane bonds yield about 23.6%.To understand the risks attached to the different metros in South Africa, it is important to understand how ratings agencies view them, and right now Moody’s is the only major international agency that keeps watch. All four reside in “junk” territory, which means they aren’t investment grade. At least, on a global level.Cape Town currently holds the strongest position at Ba2, which is two notches below the investment-grade threshold of Baa3 and is capped by the national sovereign rating. Joburg sits one level lower at Ba3 and is currently on review for downgrade due to governance and reporting delays. Tshwane is at Caa2, a deeply speculative rating that is eight notches below investment grade, indicating a very high level of credit risk and poor financial standing. Similarly, the City of Ekurhuleni was historically rated in the Caa range before its ratings were recently withdrawn. It narrowly avoided JSE suspension after filing its returns late, and received a qualified audit opinion.“The ratings agencies are behind the curve again,” Scott says. The ratings indicate “there’s a high probability that these guys will repay their loans, but I’m saying that probability is much lower than you think”.Elevated credit riskCasey Sprake, a market strategist at Anchor Capital, takes a much more measured view.“The market is pricing elevated credit risk – particularly around governance, audit integrity and the technical acceleration risk – but not an imminent payment default on any of the three,” she tells Currency, referring to Gauteng’s metros of Joburg, Tshwane and Ekurhuleni.Bonds account for only 13% of Joburg’s debt stack; bank loans make up the other 87%.A default on a JSE-listed bond – the kind of event that typically triggers a sharp market repricing – is therefore unlikely to be the first symptom of trouble. A loan covenant breach is. There is also the question of state support. As South Africa’s economic hub, Joburg is widely seen as too important to fail outright, reinforcing expectations that the Treasury would step in before any disorderly default.The city has until May 31 to deliver its financials. If city bosses miss that deadline, says Sprake, the downgrade “is a given”, which could be enough to trigger covenants on its bank loans, potentially accelerating repayment demands. “That is the scenario where the market would move from ‘wide spreads’ to ‘distressed’,” she says.The JSE suspension, the city said in a statement at the time, was a “technical compliance matter related to reporting timelines, not an indication of financial distress or instability”, and it “remains financially operational and continues to meet all its debt servicing and financial obligations without interruption”. By Wednesday afternoon it had not publicly responded to Godongwana’s letter.Debt cascadeIf the cascade does come, the mechanics are unforgiving. The pari passu principle means a coupon miss on a single bond turns the entire debt stack acceleratable.In other words, “when you default on a bond all your debts become payable. That’s all your bank loans, development finance loans and overdrafts because they all sit at the same senior unsecured level of the capital structure,” Scott warns. Any bank, in other words, would have the right to call in what it is owed.What follows is uncharted.“No JSE-listed metro has defaulted on a coupon in the post-MFMA era, so the bondholder playbook under chapter 13 of the [Municipal Finance Management Act] is largely theoretical,” Sprake says. The act envisages the province stepping in alongside National Treasury to develop a financial recovery plan, with the power to dissolve the council and appoint an administrator until a new one is elected. The plan could include the sale of municipal assets and the “termination” of staff, subject to the municipality maintaining a minimum level of basic services.South Africa’s outstanding municipal bond debt is relatively contained at R5bn by Scott’s estimate – small enough for a Treasury bailout to be manageable.Still, “what type of precedent are you setting?” asks Scott. “You’re placing a National Treasury taxpayer put under a municipality and you’re saying: ‘Go and be reckless with taxpayer money and we’ll just bail you out.’ You’re paying twice for their indiscretions.”.Edited transcript of the interview.Irakli (00:01.215) Hi, it's Irakli from BizNews. I have Giulietta Talevi from Currency News, and she is covering South Africa's economic capital getting into deeper financial trouble than almost anyone is admitting. Finance Minister Enoch Godongwana sent Joburg Mayor Dada Morero a sharp April 23rd letter accusing him of illegally signing a 10.3 billion-rand wage deal with municipal workers that the city cannot afford.Thank you, Giulietta, for joining us today. Can you explain to us the bigger picture and what this means and why it matters for the city?Giulietta Talevi (00:38.494) Thank you, Irakli, for having me on your show. The bigger picture is that Joburg is in a parlous financial state. And Enoch Godongwana's letter to the mayor was, as you correctly said, primarily about the wage deal that they've signed, that he says, you know, you cannot afford this. And it's a deal over the next couple of years. And in it, the letter essentially revealed to everyone what we had suspected, but not actually known — the financial picture of Johannesburg, which is shocking.So in it, the minister sketched out how the City of Joburg has 3.9 billion rand cash on hand, but it owes 25 billion rand. So, I mean, technically, you would say that it's bankrupt now and cannot afford an excessively expensive wage deal.And the reason why it matters is because Johannesburg still accounts for a big chunk of South Africa's GDP. It's a really, really important city. So even though it's been allowed to fall into this state of decay and financial distress, it still matters deeply. You've got the stock exchange, it is still home to most of the head offices of South African business. So it's really important that it gets its financial picture sorted.Irakli (02:13.729) And you mentioned how Moody's now has the city on review for downgrade. After speaking with experts, what are they saying?Giulietta Talevi (02:23.948) Okay, so the Moody's review was primarily initiated as a result of the City of Johannesburg not filing its audited financial statements within the time period demanded by the Johannesburg Stock Exchange. Because its bonds are listed, it has to do that. You have six months in order to file your audited financial statements. And this is for the results to the end of June 2025.So it still hadn't done that. And so its securities — its bonds — were suspended on the JSE by the exchange. Now Moody's has quite a generous rating, according to a couple of the bond analysts I've spoken to. This effectively prompted Moody's to relook at the rating it gives Johannesburg and to put it on review for a possible downgrade.Now they have to produce their statements by the 31st of May. This is absolutely paramount for the City of Joburg to do. They've kind of brushed it off as a technical matter — and it was a technical matter with the Auditor-General, they say. But Moody's is actually saying to us that the failure to produce the financial statements indicates serious deterioration in governance, and not just Joburg's financial health. So that is why they have it on review for downgrade. And the bond analysts I've spoken to say that if they don't produce these financial statements by the end of May, a downgrade is pretty much absolutely certain.Irakli (04:08.449) And there's a domino risk here, it seems — that if a potential default is on the way, this could mean a much, much bigger consequence, is it not?Giulietta Talevi (04:21.676) Yeah, so it's not necessarily the case that the downgrade prompts the default. It just says to you that you're a much greater credit risk. So anyone who was thinking of happily lending the City of Joburg money is going to think twice about it, the deeper into junk territory the city's ratings go. So the two are separate. But Joburg has a bond due on the 22nd of June — it has to pay 1.4 billion rand as part of its listed bond. So if it does not pay that, if it doesn't have the money to pay that, then it does go into default. And that, as you say, is sort of a domino effect. What that can prompt is that all of its debts could become due simultaneously.I'm not sure that's going to happen, because 1.4 billion rand in the scheme of things actually isn't massive. And in total — not just the City of Joburg, but Tshwane, Ekurhuleni, eThekwini and the City of Cape Town — the size of this market is actually kind of small. It's only about 5 billion rand collectively. And so that's tiny in the scheme of debts. SA's head debt is just under half a trillion rand — just to put that in perspective. Joburg has to repay this debt in June. That is the question of default. That's where it comes up.Irakli (06:05.438) And what kind of precedent is this setting? I mean, if Joburg is too big to fail, where does that leave the taxpayers?Giulietta Talevi (06:15.618) Well, as you say — Ian Scott from Chartis Asset Management, who actually alerted me to this, spoke to us. Ian's contention is that the ratings agencies, even though they've got Joburg on review now for downgrade, are behind the curve. He says the finances are worse than people think, and they should be trading much deeper into debt, which would also affect the yields that they pay on their bonds, right? So Joburg's is like 11 and a half percent or thereabouts, which is not terrible — well, it was, when it was suspended. Tshwane, for example, is over 23%. And Tshwane is in deep junk territory. Sorry, I've lost my train of thought here.Irakli (07:00.395) No, you're right. I think what you're heading towards is — taxpayers have been here before, you know, and there's this risk of paying twice. Could you perhaps speak to that? We've seen, I mean, both you and I are in Joburg — we've seen the e-toll saga…Giulietta Talevi (07:10.624) Exactly. Yes, sorry, I was going to get onto the point of moral hazard. As you say, it's a "taxpayer, a treasury-funded put," is how Ian Scott put it. So yes — if national government bails out the City of Joburg, what you're effectively saying is, okay, you can mess up, you can collapse the financial situation of the country's biggest metro, and we'll bail you out because you're too big to fail. So it does create this moral hazard.But, yes, it's moral hazard and yes, it's taxpayers on the hook again. You know, we're on the hook sort of twice for everything, right? We pay our taxes, but then we have to pay for private services in every other regard of our lives. But I think, on balance, the state would probably have to take quite a pragmatic view, because it's maybe the lesser of the evils — you don't want a huge cascading debt default, you don't want everyone to call in their loans, because then you've got a much bigger problem. So if I were looking at this, I would probably say, okay, I'll bail you out. But it is also possible — and what they are doing as the stick is…Irakli (08:27.691) Yeah, could you elaborate?Giulietta Talevi (08:41.134) The City of Joburg has this conditional grant, as do all metros. So the Treasury can threaten, as they have done, to withhold the conditional grant. So they have levers to pull to get the city to act properly. But maybe when your leadership is so incapable of doing the right thing, maybe that's a foolish assumption.Irakli (09:07.681) And it just seems that the incentives are not aligning here. And to your point, the Treasury withholding that 8 billion rand that you mentioned in your article — nearly 10% of Joburg's entire annual budget — may not even hold. Right. And I just want to go back to your comment around the mechanics of debt and the debt structure. Perhaps we can just elaborate that a bit further for our viewers.The pari passu principle — Latin, meaning "equal footing" or "step by step" — what does that mean? And what do we mean by, in Joburg's context, all of a city's debts coming back at the same level and everything being called in at once?Giulietta Talevi (09:52.282) Nothing is secured. There's no collateral here. And actually, this is where I'm not an expert — so please forgive me, I'm not a bond expert. Because it's sort of unsecured credit, it just means all…Giulietta Talevi (10:19.308) …creditors are treated equally. So that's the pari passu principle. If there is a default event or a credit event, it means that everyone should be treated equally. Everyone at that point — that's why the risk is that they could all say, "I want my loans repaid, because I have the right to have them repaid, because we're all treated equally."Irakli (10:32.381) Mm-hmm. And everything falls apart.Irakli (10:47.073) And the May 31st deadline?Giulietta Talevi (10:51.522) So that's when they have to come up with the financial statements. This is the Moody's issue. Moody's wants to see evidence of the audited financial statements. And then the June deadline is the bond repayment of 1.4 billion. So those are two sort of critical dates.Irakli (11:13.857) So if Joburg misses the May 31st deadline, then a downgrade is virtually certain, and then the domino effect follows.Giulietta Talevi (11:24.598) Yeah, so Casey Sprake, who's a market strategist at Anchor Capital, sent me some really interesting thoughts about this. I believe Absa is also now kind of looking at what constitutes a default. You know, is a downgrade what constitutes a default? Because they're also trying to get their heads around this. Casey was pretty much of the view that a downgrade was for certain if they didn't come up with the statements.Irakli (11:55.817) And when we look at the precedent, we see the debt crisis that Joburg's been through before — specifically on e-tolls. And we ended up as taxpayers paying twice. It almost seems like there is a pattern there. So it's very interesting how we're landing in the same spot. But thank you.Giulietta Talevi (12:17.166) In a way, yeah — although as Casey points out, there's no precedent for a bond default in recent times. So if that were to happen, we're in kind of uncharted territory in terms of the Municipal Financial Management Act.Irakli (12:40.417) Thanks so much. This is Irakli from BizNews. Thank you, Giulietta Talevi, for being with us, and please do check out the article on biznews.com. Thank you.Giulietta Talevi (12:50.434) Thanks, Irakli.

Joburg's debt reckoning: Giulietta Talevi

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