The revision of Zambia’s sovereign rating by Standards and Poors Global from negative to POSITIVE-WITH-A-STABLE-OUTLOOK is an affirmation of the soundness of the policies being implemented by the Government of President Edgar Chagwa Lungu to stabilize and grow the economy, FINANCE MINISTER FELIX MUTATI has said.
STANDARD AND POORS [S&P] GLOBAL RATINGS has revised Zambia’s outlook on the ‘B’ long -term foreign and local currency sovereign ratings to STABLE FROM NEGATIVE. At the same time, the ‘B’ long-term and ‘B’ short-term sovereigns have been affirmed.
“This development rides on the basis of the critical reforms which we have embarked on as a country under the Economic Stabilisation and Growth Programme to implement fiscal consolidation, remove subsidies, reform the energy sector, and embark of diversification of the economy through agriculture development and industrialisation,” Mr. Mutati has said.
“The result from the assessment conducted by S&P Global is a welcome incentive for investors as they should remain confident assured that this country is on track with economic stabilisation and growth,” he said.
“We will work diligently to ensure that the confidence of our people and that of investors in the good intentions of the government to stabilize and grow the economy are not taken for granted,” assured Mr. Mutati.
According to the report on Zambia issued by S&P Global last Friday 25th August, 2017, “although still tight, the government’s fiscal financing position appears more assured, with domestic liquidity conditions continuing to improve.”
S&P Global has also observed in the report that the country’s economic growth prospects are improving, as a result of which, they said, they were revising their “outlook on Zambia to stable from negative and affirming the ratings at ‘B/B’.”
In the report issued by BENJAMIN YOUNG, Primary Credit Analyst, and GARDNER RUSIKE, Secondary Credit Analyst, S&P Global further stated that Zambia’s “stable outlook, balances an improving macroeconomic picture against a number of negative rating pressures, including a still large fiscal deficit and substantial debt stock.”
They cautioned that the rating could be lowered if the government materially deviated from its FISCAL CONSOLIDATION TARGET.
“We could also lower the ratings if previously destabilizing factors re-emerge, for example, if copper prices were to materially fall, or if rainfalls disappointed, or if improvements in the liquidity of the domestic banking system reversed,” they said, adding that “these factors have a substantial bearing on macroeconomic stability, growth, and the government’s financing position.”
S&P Global noted that, “should Zambia’s external imbalances reduce materially faster than expected in tandem with faster growth than they currently expect, which could raise their GDP per capita trend growth forecast, “UPWARD MOMENTUM ON THE RATINGS COULD EMERGE.”
“We have assigned a stable outlook to reflect a number of more positive developments that we expect will continue to reduce pressure on Zambia’s fiscal, economic, and external assessments,” they said, adding that they still assessed “Zambia as being highly vulnerable to a reversal of these trends, despite the authorities implementing policies that aim to reduce macroeconomic susceptibility to such events,” and further stating that, “we have improved our economic growth forecasts and expect increased economic output will be supportive of corrective fiscal measures.”
In the report, S&P Global views reducing fiscal deficits and the stock of debt as CORE TO ZAMBIA’S RATING TRAJECTORY, particularly as larger external debt maturities enter the forecast horizon through 2020.
S&P Global expects the agreement with the International Monetary Fund (IMF) to be in place by year end and that this will act as a policy anchor.
“We also note that discussions with the IMF have been ongoing for well over a year, derailment of an expected agreement could dent confidence, reduce investment, and offset the positive factors,” they said, and cautioned that, “it could also risk the benefit to external finances of increased foreign participation in the government’s local currency debt market.”
S&P Global further noted that, “particularly between now and an IMF disbursement, higher copper prices and an expected increase in copper output are both supportive of not only higher growth but also of banking system liquidity, which in turn is a key source of government financing.”
Copper prices have risen by about 18% in 2017 and core liquid assets in Zambia’s banks by some 44% over the same period. The Bank of Zambia has continued to ease its policy rate and Zambia’s currency, the kwacha, has remained on a slight appreciation path for some time now. As a result of these factors, the cost of debt for the government has also reduced. A related factor, given that inflation has fallen, is that foreign participation in the local bond market has increased by around 2.5% of GDP over 2017, which is a helpful current account deficit financing item.
“On the downside, the factors leading to anticipated higher growth are largely outside of the government’s immediate control, leaving them vulnerable to calming demand for copper or unfavorable weather patterns,” said S& P Global, acknowledging that, “the government has made efforts that are gradually diversifying the country’s energy mix.”
AND Mr. Mutati has reaffirmed that government will continue to pursue fiscal consolidation, economic stabilisation, and growth. He maintained that the Ministry of Finance will remain highly alert on the need to reduce borrowing by enhancing resource mobilisation initiatives such Public Private Partnerships, increasing grant-inflows, and reinforcing tax-related initiatives which are targeted at strengthening enforcement and compliance.
S&P Global Ratings’ analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and, (v) monetary assessment.