Zambia gets rating upgrade

Zambia’s long-term local-currency (LTLC) issuer default rating (IDR) has been upgraded to CCC from CC by Fitch Ratings on continued domestic debt servicing.

The country has not been given an outlook, as Fitch does not assign outlooks to countries with a rating of CCC or below.

Fitch’s rating reflects Zambia’s continued local currency debt servicing, with the government making no indication that it plans to include domestic debt in any potential debt restructuring.

This means an eventual re-structuring of external debt could improve the overall public finance position and support local-currency debt sustainability.

However, the CCC rating still reflects a real possibility of a local-currency default, given Zambia’s weak public finances and tight domestic financing conditions.

Fitch estimates the 2020 general government deficit widened to 12% of gross domestic product (GDP) and forecasts a 2021 deficit of 10.3%.

General government debt reached an estimated 114% of GDP at end-2020, versus the current B median of 66%.

The government’s weighted-average cost of domestic government bond issuance reached a real rate of 11.7% in February, when inflation was 22%.

Meanwhile, Fitch has affirmed Zambia’s long-term foreign-currency (LTFC) IDR at RD.

Zambia’s LTFC IDR reflects the government’s outstanding Eurobonds pending a restructuring since its failure to pay the coupon due 14 October 2020 on its $1 billion Eurobond maturing in 2024.

The government has continued to service foreign currency-denominated debt to multilateral financial institutions and debt on a few priority projects that have immediate social and economic impact.

Zambia officially requested debt treatment under the G20 Common Framework in February 2021, and began discussions with the International Monetary Fund (IMF) on a possible support programme.

Debt treatment under the common framework is likely to be driven by the outcome of a debt sustainability analysis prepared by the authorities with the IMF and the World Bank.

Given that an IMF programme will require significant policy adjustments. Fitch believes that final approval of a programme is unlikely before the 2021 general election that is currently scheduled for August.

Fitch would consider upgrading the rating if Zambia reaches an agreement with the bondholders on restructuring its long-term foreign currency debt.

The rating agency may downgrade Zambia’s LTLC if the government announces clear plans to restructure its kwacha-denominated debt.

Fitch may also downgrade Zambia’s LTLC if the government enters a grace period on its local-currency debt.

This comes after Fitch downgraded Zambia’s LTFC IDR from C to RD in 2020. The RD rating is allocated to entities that have experienced an uncured payment default on a bond, loan or other financial obligations.

See full rationale here