London, 19 April 2016 -- Moody's Investors Service (Moody's) has today downgraded Zambia's
long-term issuer rating to B3 from B2 and changed the outlook to
negative from stable.
The downgrade on the issuer rating was driven by:
1. Greater-than-anticipated fiscal slippages in 2016
leading to material liquidity pressures and significant challenges to
finance the budget deficit;
2. The prospects of further deterioration in Zambia's debt
matrix in a lower growth environment, with the government debt likely
to exceed 60% of GDP by 2018
The negative outlook reflects the view that risks are skewed toward even
greater fiscal slippages and slower fiscal consolidation, which
creates uncertainty over the magnitude of the funding challenges and deterioration
of Zambia's debt profile over the rating horizon.
Concurrently, Moody's has lowered Zambia's long-term foreign-currency
bond ceiling to B1 from Ba3, its long-term foreign-currency
deposit ceiling to Caa1 from B3, and its long-term local-currency
bond and deposit ceilings to Ba2 from Ba1.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE
Zambia's credit metrics have deteriorated beyond Moody's expectations
since the agency downgraded the rating to B2 in September 2015.
The negative trend in the credit metrics is expected to continue for at
least two years, given the combination of shocks to the economy,
the track record of missed fiscal targets and the absence of efforts to
achieving sustainable fiscal consolidation. The downgrade to B3
is intended to capture this ongoing weakening of the government's
balance sheet and related liquidity risks.
FIRST DRIVER: GREATER-THAN-ANTICIPATED FISCAL SLIPPAGES
LEADING TO LIQUIDITY PRESSURES
In 2015, Zambia's fiscal deficit reached 8.1%
of GDP, up from 5.6% deficit in 2014. Moody's
expects that without measures to rein in expenditures, the fiscal
deficit will remain elevated and reach 7% or more of GDP this year.
The notably higher-than-projected power deficit (1,000
MW vs. 560 MW estimated in September 2015) has already necessitated
costly electricity imports while sharp depreciation of currency increased
the need for fuel subsidies. These factors have contributed to
large spending overruns, which, if continued, are estimated
to amount to 3% of GDP for the year. Lower for much longer
copper prices, together with rain shortfalls and electricity shortages,
have led to subdued growth and put additional pressure on the budget through
weaker revenue.
Zambia's high funding needs in the coming months and years present
a significant challenge for the government given the country's relatively
underdeveloped domestic capital market and reduced risk tolerance of international
investors. Domestic borrowing costs have risen sharply over the
past year with yields on 1-year treasury bills reaching 28%
in March. These high domestic borrowing costs and the impact of
a weaker currency on cross-border borrowings have given rise to
interest payments consuming an ever larger portion of budgetary revenue.
Interest payment-to-government revenue ratio will likely
near 20% this year, up from 8% in 2013. The
general increase in yield rates on Government securities was largely attributed
to the higher than projected fiscal deficit and the tightened monetary
conditions.
Zambia's financing options in the international capital market are
limited given the investors' reduced risk appetite and the yield
on Zambia's ten-year government bond at 12%.
While still above three months of imports, foreign exchange reserves
declined to US$ 3 billion in 2015 despite the sovereign bond issuance
that year. Moody's projects that in 2016 forex reserves will
fall to $2- 2.3 billion, below three months
of imports.
SECOND DRIVER: RAPID DEBT ACCUMULATION AND THE PROSPECT OF FURTHER
DETERIORATION IN DEBT METRIX
The second driver for changing Zambia's rating is the expectation
that public debt will reach 56% of GDP in 2016, notably above
Moody's expectation of 45-50% a year ago, and
will rise above 60% by 2018. The government domestic arrears
accumulated in 2016 point further to emerging debt sustainability challenges.
While in 2015 kwacha's rapid depreciation was a key driver of the
rapid public debt accumulation, Moody's expects the elevated
fiscal deficits in 2016 and 2017, in combination with lower growth,
to drive future debt-to-GDP accumulation, which is
now close to median of B3-rated peers.
Although the government plans to reduce the fiscal deficit to 4%
of GDP this year, in part by cutting capital expenditures,
and adopt further consolidation measures in 2017, Moody's
believes that given the track record of missed fiscal targets, deficits
are likely to remain higher than targetted.
Sustainable fiscal consolidation will be challenging against the background
of persistent structural weaknesses, particularly electricity shortages,
and low copper prices. Moody's latest growth projections
assume just 3-3.5% growth in 2016, compared
to our forecast of 5.2% in September 2015. This puts
additional pressure on the debt-to-GDP ratio. Moody's
projects a return to +5% growth after 2018, as it expects
the electricity shortages to be much less pronounced, while mining
is projected to rebound due to current investments and cost reducing measures.
The government has recently announced its plans to negotiate an IMF program,
which would help not only with the liquidity challenges but also with
putting public finance on a sustainable path. However, a
formal agreement has not been reached so far. In Moody's
view, the process is likely to be prolonged and only take --off
after the presidential elections scheduled for August this year.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects heightened uncertainty about spending in
the run up to the August elections and uncertainty about the liquidity
and funding position of the government over the next 12-18 months.
What could change the rating up/down
Downward pressure on Zambia's rating could develop due to: 1) a
further increase in electricity shortages or drop in domestic copper production
that would cause a material impact on the government's fiscal position
or the country's external position; or 2) larger-than-expected
twin deficits and a strong upward trend in the overall debt burden;
3) a continuation, if not worsening, of liquidity pressure
causing a further abrupt reduction of growth-supporting capital
expenditures; and 4) a sustained decline in foreign currency reserves
to below 2 months of import cover that amplifies the country's external
vulnerability to shock.
While an upgrade is unlikely in the near term, should the trends
motivating the negative outlook dissipate or reverse in the next 12-18
months (for example, the fiscal deficit contracts to less than projected
and in a sustainable way, uncertainty regarding government funding
is reduced, and/or the current account returns to surplus),
outlook could be stabilized. Zambia's credit profile would likely
remain in line with peers at the B3 level, including other commodity
exporters, justifying a return to stable outlook.
Prompted by the factors described above, the publication of this
credit rating action occurs on a date that deviates from the previously
scheduled release date in the sovereign release calendar, as published
on www.moodys.com.
GDP per capita (PPP basis, US$): 3,811 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.2% (2015 Expected)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 21.1%
(2015 Expected)
Gen. Gov. Financial Balance/GDP: -8.1%
(2015 Expected) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.3% (2015 Expected)
(also known as External Balance)
External debt/GDP: 42.6% (2015 Expected)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 14 April 2016, a rating committee was called to discuss the rating
of the Zambia, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become increasingly susceptible
to event risks. Other views raised included: An analysis
of this issuer, relative to its peers, indicates that a repositioning
of its rating would be appropriate.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. On
this basis, the rated entity or its agent(s) is considered to be
a participating entity. The rated entity or its agent(s
) generally provides Moody's with information for the purposes of
its ratings process.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Zuzana Brixiova
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Zambia's issuer rating to B3 with negative outlook
