Standard and Poor’s maintains Zambia’s ‘B/B’ Ratings, negative outlook

Rating agency Standard and Poor’s says the Zambian government’s financing position remains very tight, with access to external debt markets and available domestic capacity both limited.

And the agency has maintained the country’s ‘B/B’ credit rating with negative outlook.

It said the negative outlook reflects the downside risk that fiscal financing pressures could increase further in the face of high maturities over 2017, while economic growth momentum has weakened.

In its latest report on Zambia, S&P says it expects that fiscal deficits will remain wide over the forecast, in part because of high and increasing interest and other expenditures, but also as accrued arrears estimated at 9% of GDP are gradually cleared.

It however expects that an International Monetary Fund program, which should ease financing conditions and require the implementation of a firm fiscal consolidation plan, will be in place by the middle of 2017.

“We are therefore affirming our ‘B/B’ ratings on Zambia. The negative outlook reflects the downside risk that fiscal financing pressures will increase further in the face of high debt service over 2017 and weaker economic growth momentum,” it said in its analysis.

It said government revenues have increased only incrementally and the agency has revised its economic growth expectations downward.

“Domestic debt redemptions in 2017 are almost double that of 2016, at 1% of GDP, and Eurobond coupon payments are also estimated at just
over 1% of GDP. Offsetting these strains, we expect an International Monetary Fund (IMF) program to be in place by the middle of the year, bringing with it financing support and a firm policy anchor,” it said.

“If needed, we expect the government will meet maturities by diverting revenues earmarked for other purposes or, in extremis, by asking the central bank for an interim loan, although we note bridge loans are already close to their permitted maximum. The new government has stated that the clearance of arrears is a priority action as part of its “Zambia Plus” strategy for economic recovery.”

It says it expects that the IMF will require the estimated 9% of GDP of arrears
accrued over 2015 and 2016 to be cleared over the course of the program, and this will keep headline fiscal deficits wide over the forecast horizon.

It adds that it expects the underlying fiscal consolidation to act as a break on economic growth as public consumption reduces.

“Conversely, we expect that the recent climb in copper prices could be an impetus for growth, particularly after an IMF program is in place.

We view both as important for investor confidence, as the earning potential in mining operations becomes more tangible, and government policy over public finances firmer.”

It added, “As to government policy, we expect an IMF program to help deliver a decision on the final mining tax regime, which has been a key source of
uncertainty for a number of years and particularly since commodity prices
started to fall.”

It says the increase in copper prices could provide an important boost to government revenues and support foreign currency inflows into Zambia.

It however, the government’s fiscal position remains difficult with average interest rate on domestic debt issuance remains above 20% across all maturities.

“In terms of the consolidation path, we expect that capital expenditures, transfers, and subsidies (including to the Food Reserve Agency, which purchases corn from farmers) will be targets for cuts, despite social sensitivities surrounding them.”

“On the revenue side, we expect that changes to mining-related taxes are also likely to be finalized,” it said.

“The outlook is negative, reflecting the downside risk that fiscal financing pressures could increase further in the face of high maturities over 2017,
while economic growth momentum has weakened.”

It added, “We could lower the ratings over the next year if there are further material delays to plans to put public finances on a sustainable path, including
securing debt financing.”

“We could also lower the ratings if levels of investment, including FDI, remain low or worsen, increasing external financing needs and potentially compounding already weaker economic growth. We could affirm the ratings at their current levels if sustainable fiscal and economic policies are implemented efficiently, thereby leading to assured financing conditions and an acceleration of economic output.”