MOODY’S INVESTORS SERVICE has, Friday, January 26, 2018, upgraded the rating outlook for Zambia to STABLE FROM NEGATIVE.
According to a rating action statement issued in London by Moody’s, THE STABLE OUTLOOK REFLECTS REDUCED GOVERNMENT LIQUIDITY PRESSURES AND A SLOWDOWN IN GOVERNMENT DEBT ACCUMULATION.
On 24 January 2018, a Moody’s rating committee was called to discuss the rating of the Government of Zambia. The main points raised during the discussion were that, Zambia’s.
1) Fiscal or financial strength, including its debt profile, has materially decreased;
2) Susceptibility to event risks has not materially changed; and,
3) ECONOMIC FUNDAMENTALS, INCLUDING ITS ECONOMIC STRENGTH, have materially increased.
Moody’s indicated that the affirmed B3 long-term issuer rating, balances a strong growth potential boosted by ample natural resources and a young and growing population against continuing credit challenges which include a MODERATE DEBT BURDEN, though with a very high share denominated in foreign currency, low debt affordability, and risks of further fiscal slippage. Other challenges highlighted by Moody’s include sizeable funding requirements, a rising reliance on external debt including for local currency government securities, and large Eurobond maturities due early in the next decade.
They also stated that the government’s GRADUAL PROGRESS WITH FISCAL CONSOLIDATION IS HELPING TO CAP BORROWING needs and gradually restore policy credibility. As a result, the pace of increase in government debt from 2014 to 2015 is NOT EXPECTED TO REPEAT. Moody’s has indicated that evidence of fiscal consolidation, together with a favourable commodity price environment, fosters stability in the exchange rate allowing the central bank to ease monetary policy, and in turn contributes to support liquidity in the banking sector.
Below is the exerpts from Moody’s statement
Moody’s estimates that in 2017, Zambia’s fiscal deficit fell to 6.5% of GDP, down from an 8.6% deficit in 2016. With the total deficit being the main source of funding over the past few years, the gradual REDUCTION IN THE FISCAL DEFICIT ALLEVIATES LIQUIDITY PRESSURES and has supported an easing of monetary policy.
Moreover, reduction of the electricity supply gap…lowered costly electricity imports funded by the government while fuel subsidy reform and currency stability have reduced the government’s subsidy bill. The government has also raised retail power tariffs by 75% and has increased the tariff for mines…overall, these amount to savings of around 2% of GDP relative to 2016 outcome.
These measures contribute to REDUCED PRESSURES FOR SPENDING OVERRUNS and also helps the government in reducing its expenditure arrears, accumulated mostly in the aftermath of the copper price shock in 2015 – 2016. In 2017, arrears worth 3% of GDP were settled.
Moody’s expects that FISCAL REVENUES WILL GRADUALLY RISE over the medium term, to around 18% of GDP in 2020, from around 16% in 2016, supported by higher copper prices, higher copper production and structural tax measures. Such measures are likely to include steps towards implementation of more effective tax regimes and tighter incentives for compliance. Combined with fiscal measures to rein in expenditures, the fiscal deficit will continue to fall and reach 5.7% of GDP in 2018 and 5.0% in 2019.
Moreover, the government has implemented a new Public Financial Management Act and established control over non-concessional borrowing, reducing the risk of liquidity pressures going forward. In particular, ALL NEW NON-CONCESSIONAL BORROWING HAS BEEN SUSPENDED since November 2017 unless approved by Cabinet. The government has also embarked on implementing the Treasury Single Account to reduce future arrears occurrences. Moody’s expects the remainder of the government expenditure arrears to be cleared by 2020. Overall, Moody’s expects that gross financing needs WILL BE CONTAINED BELOW 15% OF GDP and gradually subside, facilitating further easing liquidity pressures.
With ongoing, albeit gradual, fiscal consolidation, and robust nominal GDP growth, government debt will rise very gradually as a ratio to GDP. Moody’s Projects Real GDP growth above 4% in both 2018 and 2019, and NOMINAL GDP GROWTH AT AROUND 13%, supported by a robust global growth environment and demand for copper and an easing of some of the domestic structural bottlenecks including in power.
Despite progress with fiscal consolidation, Zambia’s gross funding needs, which Moody’s estimates at almost 14% of GDP in 2018, present a risk for the government given the country’s narrow domestic capital market and potential sudden changes in risk appetite by international investors. Interest payments consume almost a quarter of budgetary revenue, up from 5% in 2011. While increased participation of foreign investors in government local currency securities has eased the government’s financing constraints, it amplifies the sensitivity of financing conditions to fluctuations in foreign investors’ sentiment.
Moreover, unless the government refinances its external debt maturities ahead of schedule, its funding needs will rise again significantly in the early part of the next decade, with the first Eurobond maturity due in 2022, and two other Eurobonds maturing shortly after. This concentration of Zambia’s maturities coincides with large maturities for a number of other Sub-Saharan African countries, amplifying roll-over risk.
Finally, A REPEAT OF FISCAL SLIPPAGES or significant depreciation of the currency seen in recent years, leading to the re-emergence of government liquidity challenges and increased indebtedness, could drive a negative rating action.
The absence of a clear and credible plan to manage refinancing risk as the Eurobond maturities in the early part of the next decade near, would also put pressure on the rating. An absence of long-term fiscal and other structural reforms, including narrowing the energy gap over the medium term thereby reducing potential growth and undermining fiscal strength would also put downward pressure on the rating.
Faster progress with FISCAL CONSOLIDATION than we currently expect that markedly reduces the likelihood of liquidity pressures returning and brings government debt on a distinct downward trajectory would be credit positive. PROGRESS WITH ECONOMIC DIVERSIFICATION AND STRUCTURAL REFORM that leads to higher and more stable growth would also support Zambia’s creditworthiness in the medium term.
Commenting on the development, Finance Minister Felix Mutati has said the IMPROVED OUTLOOK IN THE ZAMBIAN GOVERNMENT’S RATING is not only an important indicator of the international community’s discernment of Zambia’s political, social and economic stability but also an endorsement of the country’s consistent and market friendly development policies.
“The rating upgrade is a confirmation that Zambia’s image is venerated, therefore, our private sector should leverage on this positive outlook to develop credible alliances with players in the international community and grow empires which will generate jobs and create wealth,” he said.
Mr. Mutati acknowledged that the positive upgrade was based on, among other considerations, the critical reforms which the government has embarked on under the Economic Stabilisation and Growth Programme to implement fiscal consolidation, remove subsidies, reform the energy sector, and embark on diversification of the economy through agriculture, tourism, and industrialisation.
“The results of the assessment conducted by Moody’s is a welcome assurance to investors, therefore, they should remain confident that Zambia is on track with economic stabilisation and growth,” said the Minister, adding that, “we will work diligently to ensure that the confidence of our people and that of our foreign partners in the good intentions of the government to stabilize and grow the economy are not taken for granted.”
“We will endeavour to remain focused, firm, and committed in the implementation of our transformational agenda so that our gains in economic stabilisation are protected through enhanced fiscal consolidation and sustained inclusive growth, without leaving anyone behind,” stated Mr. Mutati.
