Zambia’s long and short-term foreign and local currency sovereign credit ratings have been downgraded to CCC+/C from B-/B, with a stable outlook. Standard and Poors (S&P) has knocked down the country rating over rising external debt concerns.
Zambia’s rising external debt and falling foreign currency reserves have pushed up the country’s gross external financing needs, according to S&P.
The rating agency has placed the government’s debt service average about $1.2 billion per year through to 2022, including interest plus principal. The rating agency forecasts the Bank of Zambia’s foreign currency reserves at close to $1.4 billion in 2019.
S&P estimates shows that, as of June 30, 2019, the government’s external debt totalled about $10.2 billion, or 40% of its 2019 gross domestic product (GDP). The external debt includes Zambia’s $3 billion of outstanding Eurobonds and $2 billion of private bank loans.
The remainder, which is approximately $5 billion comprises mainly $2 billion in export credit agency obligations, supplier credit, and concessional debt from bilateral and multilateral sources.
S&P expects that Zambia will continue to service its external commercial debt on a regular basis for the next two years. However, its refinancing capacity will be tested in 2022 when the first government Eurobond matures, requiring a bullet repayment of $750 million.
The generation of foreign currency, largely through copper-producing companies and mining royalty taxes paid in foreign currency, should broadly offset the foreign currency debt service.
Therefore, S&P projects foreign currency reserves at about $1 billion in 2022. However, these revenue sources make Zambia dependent on copper production and prices, in addition to general external conditions, to meet its financial commitments.
Zambia’s payment obligations therefore appear to be unsustainable in the long term, although the government does not face a near-term credit or payment crisis, according to S&P.
In the absence of a strong policy response, reflected in much faster fiscal consolidation and a reduction of debt service on foreign currency non-commercial obligations, Zambia’s creditworthiness is declining. What’s more, liquidity conditions in the banking sector have tightened amid Zambia’s weakening economic performance and the government’s payment arrears to suppliers, S&P added.
Fiscal funding gap could arise if government bond auctions were undersubscribed by private-sector banks and other market participants as was the case earlier in 2019. This is while there is a legal limit for the central bank’s financing of fiscal deficits.
Several structural factors also constrain Zambia’s overall credit quality, including low wealth, high fiscal deficits, and a large debt burden – according to S&P.
Zambia’s outlook is stable because the rating agency expects the government to meet its commercial debt obligations over the next 12 months.
On the upside, the rating agency would consider upgrading the rating if Zambia’s fiscal and external imbalances improve. This could be demonstrated, by materially stronger fiscal consolidation than S&P’s expectation or easing of the government’s foreign currency debt burden.
Conversely, S&P would consider downgrading the ratings if, for example, central bank reserves reduced, or the country’s external debt increased beyond the rating agency’s expectations.
Meanwhile, S&P has also revised the transfer and convertibility (T&C) assessment on Zambia to CCC+ from B-.
S&P’s rating comes just after Fitch downgraded Zambia’s long-term issuer rating in earlier 2019. The rating agency downgraded Zambia’s rating to Caa2 from Caa1, with the outlook changed to negative from stable over the country’s struggles with liquidity pressures.
Earlier in 2019 Moody’s also downgraded Zambia’s long-term issuer rating.
The rating agency downgraded Zambia’s rating to Caa2 from Caa1, with the outlook changed to negative from stable, over the country’s default concerns.