Rating agency Moody’s has predicted that Zambia’s debt will go beyond 110% of its Gross Domestic Product this year.
Moody’s expects the persistently large budget deficit and exchange rate depreciation to push the debt burden above 110% of GDP this year.
In its annual report, Moody’s says the huge push will be caused by the persistently large budget deficit and exchange rate depreciation.
Moody’s also predicts that Zambia’s sovereign credit fundamentals will remain very weak for the foreseeable future.
It says Zambia’s very weak credit profile (Ca stable) reflects unsustainable debt dynamics and heightened liquidity and external vulnerability pressures in the context of exceptionally difficult global conditions.
“The weaknesses in Zambia’s credit profile have left it extremely vulnerable to acute risk aversion and a prolonged period of low commodity prices linked to the coronavirus,” said Daniela Re
Fraschini, a Moody’s AVP-Analyst and the report’s co-author said, “This increases the likelihood of a sovereign debt restructuring to address its debt sustainability issues.”
The report says Zambia’s fiscal deficit again exceeded the budget target in 2019, largely because of higher than planned interest payments and capital spending, as well as support for the farming sector.
It says the fiscal slippage will continue in 2020 because of the coronavirus pandemic, while debt affordability continues to weaken.
It added that the slippage and accumulation of arrears underscore Zambia’s weak government effectiveness,which has prevented quick and decisive policy action to confront the challenges stemming from rapidly increasing debt.
“While debt restructuring has become Moody’s baseline scenario under these challenging conditions, the stable outlook on Zambia’s sovereign rating reflects a potential contrast in outcomes for private-sector creditors because a re-profiling of some non-commercial debt could limit their losses.
It says smaller losses for private-sector creditors than implied by the Ca rating as part of a debt restructuring could lead to a higher rating.
“Conversely, a lower rating would result from the increased likelihood of investors facing larger losses than implied by the Ca rating as part of a debt restructuring that Moody’s would consider to be a default under the rating agency’s definition.”