Zambia rating stays low on high debt

Zambia’s long-term foreign-currency issuer default rating (IDR) has been affirmed at CCC by Fitch Ratings. This is as the country continues to struggle under the weight of debt and shrinking foreign exchange reserves.

The country’s debt woes have been exacerbated by increased capital expenditure, while the government continues to suffer constrained access to domestic and external financing.

The Zambian government faces substantial external debt obligations including Eurobond repayments of $750 million due in September 2022, and $1 billion set for April 2024.

Fitch estimates that Zambia will have to meet about $1.5 billion in public external debt service, including interest payments in 2020.

The rating agency expects mining output to continue to be negatively affected by an adversarial relationship between the government and the mining sector.

The rating agency also expects inflation to remain above the Bank of Zambia’s (BOZ) target range of 6% to 8%.

Zambia’s 2020 budget forecasts an increase in revenue and narrowing of the cash deficit, but also contains a rise in total expenditure.

The Zambian authorities continue to engage with the International Monetary Fund (IMF), over a bailout. However, the rating agency believes that a programme will not be forthcoming until the government demonstrates its willingness and ability to decrease its externally financed capital spending.

On the upside, Fitch expects gross domestic product (GDP) growth to accelerate to 2.5% in 2020, from 2% in 2019, as rains return to normal levels.

Implementation of a fiscal consolidation plan sufficient to regain creditor confidence and increase re-financing options would lead to an improvement in the country’s rating. Fitch’s rating could also consider lifting the rating in the event of a rise in international reserve coverage, thereby raising Zambia’s ability to ensure smooth servicing of its liabilities.

An inability to access external or domestic sources of financing or increased signs of probable default could lead to a further downgrade in the rating.

In 2019, Fitch downgraded Zambia’s IDR to CCC from B- as the country struggled with liquidity pressures.

This came just after Moody’s downgraded Zambia’s long-term issuer rating to Caa2 from Caa1, with the outlook changed to negative from stable.