Fitch Ratings, an international global ratings agency which provides issuer and bond ratings, has assigned the Zambia Long-term foreign and local currency Issuer Default Ratings (IDR) of ‘B+’. Zambia’s rating is the same as that for Ghana, Kenya and Angola and one step above Lebanon’s.
The Outlook on both ratings is Stable. Fitch has also assigned a Short-term rating of ‘B’ and a Country Ceiling of ‘BB-‘.
“The ratings reflect the marked improvement in Zambia’s economic performance since 2003 driven by improved macroeconomic stability, economic liberalisation, rising private investment and production in the mining sector, and more recently, a strong agricultural performance,” says Veronica Kalema, Director in Fitch’s Sovereign Group.
“The rating is also supported by Zambia’s resilience to the global financial crisis, with growth accelerating in 2009 and 2010, and comfortable external and public debt ratios, which deteriorated only slightly in 2009 before recovering in 2010.
After spiking in 2008 and 2009, inflation fell to high single digits in 2010 and the currency has been stronger and more stable since H2 2009.”
Zambia’s real GDP growth has averaged 6.3% since 2006, in line with the ‘B’ median five-year growth average and accelerated to 7.1% in 2010.
The country has healthy medium-term prospects. Growth will be driven by rising public infrastructure investment and private investment and production in the mining sector.
Copper production reached a record high of 820,000 metric tonnes (MT) in 2010, which surpassed targets, and the government expects it to reach 1million MT in 2012.
Growth will also be supported by interventions and policies to improve the business environment, which is already well ahead of the ‘B’ peer group and close to the ‘BB’ category median.
The country’s political stability should also continue to give confidence to domestic and foreign investors. Elections are due later this year.
Debt relief from bilateral and multilateral donors in 2005 and 2006 substantially reduced debt ratios. Conservative fiscal policy since then has resulted in small budget deficits and a decline in the public debt ratio to 26% of GDP in 2010, much better than the median for the ‘B’ rating category of 35% of GDP.
However, this has come at the expense of capital investment, which, at 4% of GDP since 2006 is lower than for rating peers.
The government plans to substantially increase public investment from 2011 and will make greater use of non-concessional funds. Debt projections within Fitch’s forecast period to 2012 have debt ratios remaining below the peer group.
However, the rise in non-concessional borrowing presents risks and the government would need to implement projects within the context of debt sustainability to preserve creditworthiness.
Further ahead, the increase in the tax/revenue ratio through higher mining tax revenue as the 100% capital allowance is written off earlier than anticipated as a result of higher metal prices, will help strengthen debt tolerance, improving creditworthiness.
Zambia’s external sector has also strengthened. It has had a trade surplus since 2004, which reached a peak of 16% of GDP in 2010 due to rising copper and cobalt prices and production. This has been offset by large profit repatriation by foreign mining companies.
However, the country has achieved balance of payments surpluses in most years due to high foreign direct investment (FDI) inflows. As such, gross external debt ratios remain low. A high proportion of private foreign debt is FDI related and therefore less costly. A free floating exchange rate helps the balance of payments adjustment to commodity price shocks.
Zambia’s main weaknesses are related to social and structural issues. Per capita income at USD1,200 versus USD2,700 for the ‘B’ median as well as other human development indicators are much weaker than the ‘B’ median.
Faster growth in Zambia raised per capita growth above that for rating peers in 2009 and 2010 and per capita income has tripled since 2003. Social spending is prioritised in the budget. Nevertheless, this is a longer-term rating constraint.
Infrastructure is the other significant weakness. Energy and roads are the government’s main focus. The financing constraint has been reduced by the lifting of the IMF non-concessional borrowing ceiling to USD800m in 2011, but project appraisal capacity and actual implementation capacity may constrain the pace of implementation.
Addressing infrastructure and micro reforms that would raise growth potential and improve economic diversification will be important for improvements in the rating.
The ‘BB-‘ rating for Zambia’s Country Ceiling, a notch above the Long-tem foreign currency IDRs reflects the absence of exchange controls for two decades and reliance on foreign investment which reduces the likelihood of controls being introduced.