Fitch downgrades Zambia to junk status

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By Staff Reporter

 

Fitch Ratings has downgraded Zambia’s economic status to ‘B-‘ from ‘B’, with a negative outlook.

This is barely three months after being rated ‘B’ in July this year.
According to a statement released Thursday, the Hong Kong-based agency stated that the downgrade and negative outlook on Zambia’s Long-Term foreign currency Issuer Default Rating (IDR)s reflected the substantial upward revision in the government budget deficit targets.

The government has overborrowed in the last three years besides the US$3 billion Eurobond subscribed between 2012 and 1015.

This has resulted in the International Monetary Fund halting negotiations with the Zambian government over a possible bailout programme.

The government has also turned to China where they have borrowed over US$5 billion, mainly for capital projects such as construction and maintenance of road infrastructure across the country.

The downgrade has been attributed to, among other reasons, high debt and delayed fiscal consolidation which have also stressed the local currency.

“Delayed fiscal consolidation and high debt will weigh on macroeconomic stability. In a sign of stress, the Zambian kwacha depreciated by almost 20% in September 2018, after a period of relative stability beginning in 2016. Fitch forecasts GDP growth at 4.5% in 2018 and 2019, but emphasises that risks are tilted to the downside,’’ the statement read in part.

‘’Copper output will increase to around 830, 000 metric tonnes (mt) in 2018, and to grow at approximately 5% per annum in the following year. However, Fitch expects that copper prices will plateau, which, along with increasing mining taxes and questions about the business environment, may reduce investment in the sector. Beyond the mining sector, increased government capital expenditure will support growth in the construction and services sector. “

Fitch has since warned of increased inflation if the kwacha fall was not reversed.
The agency stated that although the kwacha might recover some ground, its volatility still raised risks to debt and Gross Domestic Product projections.

‘’Consumer Price Index growth has increased to 8% in August 2018, having fallen to 6.1% at end-2017. Inflation will accelerate further if the recent weakness of the kwacha is not reversed. The ability of the Bank of Zambia to tighten monetary policy in response will be constrained by the impact on the government’s interest expenditure which is already high, while currency depreciation will increase the government debt/GDP ratio,’’ Fitch stated further.
‘’Zambia’s sovereign ratings remain constrained by weak development indicators. Both GDP per capita and per capita income remain below half the historical ‘B’ median, and measures of human development compare weakly with rated peers. Furthermore, deterioration in performance on governance indicators has put downward pressure on the ratings.’’

The agency has forecast the country’s debt to increase from 60 per cent end of last year to 69 per cent same period this year.

Fitch expects the debt to rise further at the end of next year.

‘’This represents an increase from our previous forecast of a rise to 64% of GDP in 2018 and for government debt to begin falling in 2019. The further expected increase in foreign-currency debt will make Zambia’s debt stock more vulnerable to FX volatility and to a rising global interest-rate environment,’’ Fitch stated.
‘’Increased external borrowing will also weaken the external position. Reserves were USD 1.7 billion in August 2018, which is down from the USD2.1 billion (or 2.4 months of current external payments (CXP)) at end-2017, as the Bank of Zambia has sought to contain currency depreciation. Fitch forecasts reserves to remain below three months of CXP through 2018 and 2019.”
Following the release of the Medium Term Expenditure Framework early September, finance minister Margaret Mwakatwe later presented the 2019 national budget to the National Assembly on 28th of the same month.

Both documents laid out the government’s fiscal framework, which envisaged a reduction in the fiscal deficit to 5.1 per cent of GDP by 2021, down from 7.9 per centin 2017.

According to Fitch, the new framework represented a significantly less ambitious fiscal consolidation effort than the previous one.

And according to Fitch rating sensitivities, the main factors that could, individually, or collectively, lead to negative rating action include an inability to access external or domestic sources of financing or evidence of heightened risks in meeting debt-service payments; a failure to narrow the budget deficit and stabilise the government debt/GDP ratio; and deterioration in the external reserves position.
And the main factors that could, individually, or collectively, lead to positive rating action include narrowing of the fiscal deficit and stabilisation of the general government debt/GDP ratio; and
a rise in international reserve coverage, thereby reducing Zambia’s vulnerability to external shocks.

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