London, 03 April 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the Government of Zambia's long-term issuer ratings
to Ca from Caa2 and changed the outlook to stable from negative.
The downgrade to Ca reflects Moody's view that Zambia's capacity
to service its debt has further weakened over the past year as weak governance
has prevented rapid and decisive policy actions, leading to a substantial
deterioration of fiscal metrics. In addition, external and
liquidity pressures are rising rapidly amid exceptionally challenging
global conditions, also increasing the probability of default.
In Moody's view, a restructuring of Zambia's government
debt that constitutes a default under Moody's definition has become
increasingly likely in order to address debt sustainability issues.
Should a default occur, the losses expected to be experienced by
investors will likely be larger than Moody's previously estimated.
The coronavirus and oil price shock are creating severe and extensive
credit shocks across many sectors, regions and markets. The
combined credit effects of these developments are unprecedented and expose
sovereigns' vulnerabilities through several channels, including
lower economic growth, fiscal costs to contain the virus,
greater exposure to shifts in investor sentiment and institutional weaknesses.
Most sovereigns are relatively less exposed than other sectors to the
crisis, provided the crisis remains short-lived and growth
resumes in the second half of 2020. However, the weaknesses
in Zambia's credit profile have left it extremely vulnerable to
acute risk aversion and to a prolonged period of low commodity prices
related to the global economic impact of the coronavirus.
While under these challenging conditions a debt restructuring exercise
has become highly likely, the stable outlook reflects potential
contrasted outcomes for private sector creditors. A reprofiling
of some non-commercial debt could limit losses for private bondholders.
Conversely, without a reprofiling of some of the government's
non-commercial debt, the losses for private sector investors
in case of a default could be larger than implied by a Ca rating.
Concurrently, Moody's has lowered Zambia's long-term foreign-currency
bond ceiling to Caa3 from B3, its long-term foreign-currency
deposit ceiling to Ca from Caa3, and its long-term local-currency
bond and deposit ceilings to Caa1 from B2.
RATIONALE FOR THE DOWNGRADE TO Ca
DEBT RESTRUCTURING INCREASINGLY LIKELY AMID DETERIORATING FISCAL METRICS
AND INCREASING LIQUIDITY AND EXTERNAL RISKS
The further deterioration in Zambia's fiscal, liquidity and
external metrics, from very weak levels, as weak governance
impedes decisive policy action points to an increasingly likely debt restructuring.
Moody's estimates the fiscal deficit on a cash basis at 8.2%
of GDP in 2019 which was higher than the budget target of 6.5%
and than Moody's previous expectations. While total revenue (including
grants) overperformed the budget target, the fiscal slippage was
largely driven by pressures on the expenditure side due to higher interest
payments and significantly higher than planned capital spending and outlays
on the Farmer Input Support Program. The stock of arrears excluding
VAT refunds also increased during the year, to an estimated 6.6%
of GDP as of December 2019 from about 5.5% of GDP at end-2018.
Debt affordability continued to weaken, with interest payments absorbing
almost 30% of government revenue in 2019 from 24.3%
in 2018. The track record of fiscal slippage and arrears accumulation
underscores Zambia's weak government effectiveness that has translated
in the absence of rapid and decisive policy responses to reestablish debt
Government debt has continued to increase to very high levels, also
beyond previous expectations, due to persistently large fiscal deficits
and exchange rate depreciation. Total general government debt (including
guarantees and arrears) is now estimated at around 90% of GDP in
2019, up from 76.5% in 2018.
GDP growth was very weak last year and Moody's projects a 1%
contraction in 2020, as a gradual improvement in agriculture will
be more than offset by continuing challenges in the electricity sector
and the decline of the mining sector. The balance of risks to the
growth outlook is tilted to the downside given the difficult prospects
for the mining sector, also reflecting the risk for the copper sector
related to a prolonged fall in demand as a result of the pandemic.
In this environment, Moody's projects the fiscal deficit to remain
above 7.5% of GDP in 2020 exceeding the budget target of
5.5% of GDP as revenue underperforms given the challenging
economic conditions and spending pressures persist in particular from
interest payments due to the very high and rising cost of debt and exchange
rate depreciation, resulting in an additional fiscal slippage.
As a result, the government's debt burden will rise yet further,
approaching 100% of GDP in 2020, with the debt trajectory
remaining particularly vulnerable to a growth shock and further pressure
on the exchange rate, especially in the absence of credible policies
to rebuild the foreign exchange reserves buffer.
While foreign exchange reserves have stabilized in the second half of
2019, supported by net purchases of foreign exchange by the Central
Bank, and continued payments of mineral royalties in US dollars,
external vulnerability risk and liquidity challenges are increasing amid
the currently financial market turmoil. Pressure on the exchange
rate has recently resumed, with the kwacha depreciating by more
than 20% since the start of the year.
As of January 2020, foreign exchange reserves (excluding gold and
IMF SDR holdings) stood at $1.1 billion (equivalent to 1.7
months of imports), remained well below adequate levels to cover
imports and external debt service. Moody's expects the current
account to move into deficit in 2020 on the back of lower copper exports
and despite lower oil prices. Foreign exchange reserves are projected
to continue to decline, impairing the government's ability to service
its external debt obligations and further weakening the country's
The liquidity conditions are extremely challenging. Domestic yields
have remained very high, reflecting weak demand for domestic securities,
with auctions regularly undersubscribed. The limited absorption
capacity of the banking system due to its relatively small size compared
to the government's financing needs and already high exposure to
government securities, amplifies the risk. Meanwhile,
Eurobond yields have spiked to extraordinarily high levels, signaling
Zambia's debt distress. In addition, the gradual withdrawal
of foreign investors from the domestic markets has continued over the
past year. In this context, recent overdue debt payments
to some Multilateral Development Banks, some of which have since
been addressed, illustrate Zambia's liquidity constraints
and the challenges in meeting obligations, especially denominated
in foreign currency. Large Eurobond maturities fall due from 2022
onward, with no clear strategy to address the repayment.
In recent years, the government has consistently indicated its intention
to implement a market-based liability management exercise to improve
the external debt profile. While the outcome of this exercise is
highly uncertain, Moody's expects that it could involve significant
losses for private creditors. In particular, a liability
management exercise that would be considered a distressed exchange by
Moody's would represent a default.
RATIONALE FOR THE STABLE OUTLOOK
While a debt restructuring exercise has become highly likely, the
stable outlook reflects potential contrasted outcomes for private sector
creditors. A reprofiling of some of non-commercial debt
could limit losses for private bondholders. Conversely, without
a reprofiling of some of the government's non-commercial
debt, the losses for private sector investors in case of a default
could be larger than implied by a Ca rating.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are material to Zambia's rating and weigh
on its economic strength as weather conditions significantly impact agricultural
sector and electricity generation, given the country's high
reliance on hydropower.
Social considerations inform our assessment of Zambia's credit profile,
given very low wealth levels, with a low GDP per capita in our sovereign
rated universe, high levels of poverty and inequality. The
UN's Human Development Index 2019 ranking is also relatively low,
while high unemployment rate, especially among the youth,
remains a key challenge, exacerbating the risk of social discontent.
Governance considerations are material to Zambia's rating. They
are a driver of today's rating actions and have driven previous
rating actions. Zambia faces significant institutional challenges
in the areas of government effectiveness, rule of law and control
of corruption. Fiscal policy has been ineffective in addressing
the mounting challenge stemming from rapidly increasing debt.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
WHAT COULD CHANGE THE RATING UP
Zambia's credit fundamentals will likely remain very weak for the
foreseeable future. Smaller losses for private sector creditors
than currently implied by the Ca rating as part of a debt restructuring
could lead to a higher rating.
WHAT COULD CHANGE THE RATING DOWN
Conversely, a lower rating would result from an increased likelihood
that investors will face larger losses than implied by the current Ca
rating as part of a debt restructuring that would be considered a default
under Moody's definition.
GDP per capita (PPP basis, US$): 4,118 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4% (2018 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7.9%
Gen. Gov. Financial Balance/GDP: -7.5%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.3% (2018 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: b3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 31 March 2020, 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 institutions and governance strength,
have materially decreased. 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: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating 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.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
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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
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
These ratings are unsolicited.
a. With Rated Entity or Related Third Party Participation:YES
b. With Access to Internal Documents:YES
c. With Access to Management:YES
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome
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Please see the ratings tab on the issuer/entity page on www.moodys.com
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Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
MD - Sovereign Risk
Sovereign Risk Group
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Client Service: 852 3551 3077
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454