Standard & Poor’s Ratings Services has affirmed its B+/B long- and short-term foreign and local currency sovereign credit ratings on Zambia.
The outlook is stable.
The agency said its ratings on Zambia is constrained by its view of its policy uncertainties, fairly low economic development and vulnerability to copper price shifts, as copper accounts for almost 70% of goods exports.
It said the rating is supported by promising investment prospects in the mining sector, positive economic growth trends, moderate general government debt, and a robust external balance sheet, on which a large proportion of the external liabilities is equity.
The agency said it believes that some policy measures, largely non-anticipated, have increased uncertainties regarding the future economic policy framework.
It said these measures include the mandatory use of the kwacha in domestic transactions and for listing the prices of goods and services, the introduction of an interest rate cap on lending by commercial banks, increased capital requirements for banks and most importantly a recent amendment of the Bank Of Zambia Act that it think may open the way for potential foreign exchange controls.
The agency also stated that the political landscape has broadly deteriorated with what it views as the government’s attempt to clamp down on the opposition, including attempts to block public rallies and repeated arrests of the main opposition parties’ leaders.
It however says most policy measures have so far not dampened growth prospects, and are unlikely to become more radical given Zambia’s reliance on foreign investors for growth.
It forecast GDP growth per capita to remain above 4% in 2013-2016, supported by increased copper and agricultural output, strong foreign investment in the mining sector, and dynamic public sector investment in infrastructure, health, and education.
Standard and Poor’s expects inflation to remain in single digits, where it has been since 2010, on increased food production and contained exchange-rate volatility.
It said over 2013-2016, the rise in tax revenues from the mining sector, resulting from higher production and tax reforms, will likely mitigate the expected decrease in donor grants as well as a rise in public-sector wages.
“It should also support a slight increase in capital expenditure but we do not believe the government will implement all budgeted capital expenditure, which is much higher than previous years’. The budget deficit should remain moderate, around 3% of GDP, though debt may increase by more if the kwacha depreciates.”
“General government debt, including domestic and external arrears to suppliers, should remain under 30% of GDP in 2013-2016, on strong nominal GDP growth of 12%-14%.”
It said, “In our view, the current account will likely remain broadly balanced in 2013-2016, with increased copper output mitigating a potential decrease in copper prices. Furthermore, we expect that strong foreign direct investment inflows, averaging 6% of GDP per year, may, depending on central bank policy, contribute to foreign exchange reserve accumulation during 2013-2016.”
It added, “We estimate that at year-end 2012, the debt portion of external liabilities exceeded liquid external assets by only 6% of current account receipts. However, the external position remains highly vulnerable to a protracted fall in copper prices. Furthermore, we note significant inconsistencies between stocks and flows in Zambia’s reported external data.”
It said the stable outlook reflects our expectation that Zambia’s economic policies will not shift radically or lead to weakening of the current account or higher-than-expected fiscal expenditure, despite heightened uncertainties regarding the new administration’s policies.
The agency warned that it could lower the ratings if the administration’s policies weaken the country’s external, fiscal, or monetary fundamentals, or impair copper
production.
“A downgrade could also follow a significant deterioration of
Zambia’s external liquidity, for instance, as a result of an extended depression of copper prices.”
