A model for the determination of the creditworthiness of municipalities in South Africa

Abstract

Because the nature of municipalities differs from that of commercial institutions, norms and standards for the determination of creditworthiness are also different. Although various documented models and studies addressing credit rating related issues in the commercial sector are available, no objective model for determining the creditworthiness of municipalities has been published in South Africa. This model has been developed specifically for the determination of the creditworthiness of municipalities and is based on objective standards. All the indicators applied in the model are calculated objectively. The net product of the model is therefore a numerical figure indicating creditworthiness at a specific time. The model shows the numerical composition of the figure, and specific indicators or norms of interest can be studied in greater detail. The model has the following unique features: • It calculates a numerical value, representing the creditworthiness of a municipality. • The determination of the creditworthiness figure is objective. • Trends are calculated and form part of the calculation of the creditworthiness figure. • The model is parameter-driven - by merely changing the values in the parameter file, all the calculations are changed accordingly. • The creditworthiness figure from the model does not claim to be an absolutely accurate representation of the creditworthiness of a municipality, but claims to be accurate enough (80/20 principle) to form a basis for reliable and effective management decisions. This model is the first in South Africa. to offer a means of determining the creditworthiness of municipalities objectively. It is a simple model which is based on the elements representing creditworthiness.