Fitch Ratings has revised its outlook on Zambia’s Long-term ratings to positive from stable and affirmed the ‘B’ rating.
In a statement, Fitch said the revision of the outlook on Zambia reflects the fact that the outlook for Zambia’s public finances is more positive compared with October 2013, when it downgraded the Long-term outlook to ‘B’.
It says the risk remains that the government will overrun the deficit in 2014, due to the better than expected maize harvest and consequent spending pressure from the Food Reserve Agency, higher wages, as well as the payment of VAT refunds.
Fitch has since forecast a deficit of 5.8% of GDP and an improved fiscal outlook as well as strong GDP growth to contain the debt burden.
Fitch expects consolidated general government debt to peak at 33% of GDP in 2016, well below ‘B’ peers.
It observed that the policy environment has improved, following the uncertainty initially created after the election of President Michael Sata.
“Early pronouncements from the new administration led Fitch to revise the Outlook to Negative in February 2012. However, the decision to revoke regulations that were adversely impacting the foreign exchange market is credit supportive. Although risks persist, particularly ahead of the elections, the business environment has not deteriorated as much as previously expected and the likelihood of significant and adverse policy shifts has significantly reduced.”
“The fiscal outturn for 2013 which was 5.7% of GDP or 6.6% prior to GDP rebasing came out significantly below the budget figure of 8.6% of GDP announced in August 2013. Furthermore, fiscal data for the first six months of 2014 suggest that the deficit was well contained at 2% of GDP which was against a target of 2.5% of GDP,” the statement said.
Fitch says although this partly reflects higher-than-expected VAT receipts due to the build-up in VAT refund arrears making up 2.5% of GDP to exporters, it acknowledges the commitment to expenditure restraint over the first half of 2014.
It added, “The authorities’ decision to approach the IMF, combined with the latest medium-term expenditure framework, which shows the budget deficit falling to 3.2% of GDP by 2017, suggests renewed commitment to fiscal prudence by the government. However, possible pre-election spending ahead of the 2016 presidential contest, failure to agree on an IMF programme as well as the repayment of VAT arrears to mining companies once a final agreement is reached, all add to fiscal risks.”
It added, “Inflation remains above the Bank of Zambia’s 6.5% year-end inflation target. The current account is expected to remain in surplus over the medium term, supported by rising copper production and broadly stable copper prices. Foreign companies’ repatriation of profits abroad is more than offset by strong inflows of FDI.”
“The recent Eurobond issue has boosted reserves above three months of current external payments. The decision to revoke exchange rate regulations as well as the announcement that the government intends to approach the IMF has seen the local currency appreciate 12.9% since May, after a sharp sell-off in the first half of 2014. Nevertheless, the kwacha remains sensitive to external shocks from capital flows or copper prices.”