Fitch Ratings has recently increased Zambia’s rating to CCC (with IDR). These sovereign ratings are often the basis upon which the cost of borrowing (interest rate) and the investment readiness of a country’s government are determined.
This recent CCC rating is likely to come as a breath of fresh air to the government. Over the last 3 years Zambia has suffered a free-falling credit rating from a B in 2018, to a C on the 24th September 2020 shortly after the country defaulted on its obligation to pay an installment of repayments on the country’s November Eurobond commitment of US$42M.
Fitch acknowledges substantial efforts on the part of the ministry of Finance to reduce debt levels in the country and high levels of peace and political stability as key motives for their assesment. This also comes while the RD status (reflecting the government’s failure to pay the debt due on the 14th October 2020 which is set to mature in 2024) is maintained.
Fitch also recognized the government’s attempts to service their local currency debt which has resulted in an improved overall public finance position. Over the last few months reducing the country’s debt burden has been a key priority of the Minister of Finance Dr Bwalya N’gandu.
Zambia’s highest ranking over the last 10 years has been at B+ between 2011 and 2014 whilst the country was still obtaining the first Eurobond. At the time the government successfully obtained a loan of US$750M in a round led by Barclays and Deutsche Bank.
National debt currently stands at 114% of GDP or US$11B, as of the last budget this is increasing by nearly US$1.2B this year as of the Government Budget (thought this is to compensate for the K6 billion of taxes lost during COVID. Fitch noted the average GDP to Debt ratio (based on the median) is 66% but they believe that the country is showing promise following IMF talks. Fitch representatives said:
“The Government of Zambia officially requested debt treatment under the G20 Common Framework in February 2021, and began discussions with the 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 (DSA) prepared by the authorities with the IMF and the World Bank. An IMF statement on 3 March noted broad agreement on the ‘nature and cause of macroeconomic imbalances,’ but that key challenges remain in addressing those imbalances. Given that an IMF programme will require significant policy adjustments, we believe that final approval of a programme is unlikely before the 2021 general election that is currently scheduled for August.”
Zambia’s debt costs the country nearly K1 billion per month, and the cost of the debt is only likely to increase as we miss payments and the Eurobonds begin to mature. There is a heavier debt burden from China which has increased the pressure on some of the government’s largest infrastructure projects but this is unlikely to burden the state for long after the elections as the Economist Intelligence Unit stated:
“Zambia remains an important strategic Chinese ally, and China is heavily involved in the country’s mining sector and also has contractors carrying out numerous infrastructure works. Therefore, there is an incentive for the Chinese to help Zambia through its current debt troubles and keep the PF in power. Western countries will continue to criticise Zambia’s record on human rights and corruption and its relations with China. However, in mid-October 2020 the US announced a US$1.9B aid package for Zambia for 2021-25, and we do not therefore expect a complete breakdown in relations.”