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S&P upgrades Zambia’s credit rating, but warns of consequences if IMF deal failsBy Mukosha Funga on 28 Aug 2017
Standard and Poors [S&P] Global says Zambia should consolidate its agreement with the International Monetary Fund by the end of the year as any further derailment can dent confidence and offset the positive economic indicators.
According to a statement issued by Finance Ministry Public Relations Manager Chileshe Kandeta yesterday, S&P upgraded Zambia’s rating from negative to positive with a stable outlook but warned of consequences if the IMF deal failed.
“We also note that discussions with the IMF have been ongoing for well over a year, derailment of an expected agreement could dent confidence, reduce investment, and offset the positive factors. It could also risk the benefit to external finances of increased foreign participation in the government’s local currency debt market. Particularly between now and an IMF disbursement, higher copper prices and an expected increase in copper output are both supportive of not only higher growth but also of banking system liquidity, which in turn is a key source of government financing,” S&P said in a report issued by Primary Credit Analyst Benjamin Young and Secondary Credit Analyst Gardner Rusike.
“Copper prices have risen by about 18% in 2017 and core liquid assets in Zambia’s banks by some 44% over the same period. The Bank of Zambia has continued to ease its policy rate and Zambia’s currency, the kwacha, has remained on a slight appreciation path for some time now. As a result of these factors, the cost of debt for the government has also reduced. A related factor, given that inflation has fallen, is that foreign participation in the local bond market has increased by around 2.5% of GDP over 2017, which is a helpful current account deficit financing item. On the downside, the factors leading to anticipated higher growth are largely outside of the government’s immediate control, leaving them vulnerable to calming demand for copper or unfavorable weather patterns. The government has made efforts that are gradually diversifying the country’s energy mix.”
S&P noted that; “although still tight, the government’s fiscal financing position appears more assured, with domestic liquidity conditions continuing to improve.”
S&P Global also observed that Zambia’s economic growth prospects were improving and as such they revised their outlook on Zambia to stable from negative.
They further stated that Zambia’s stable outlook balanced an improving macroeconomic picture against a number of negative rating pressures, including a still large fiscal deficit and substantial debt stock.
They cautioned that the rating could be lowered if the government materially deviated from its fiscal consolidation target.
“We could also lower the ratings if previously destabilizing factors re-emerge, for example, if copper prices were to materially fall, or if rainfalls disappointed, or if improvements in the liquidity of the domestic banking system reversed,” they stated.
“These factors have a substantial bearing on macroeconomic stability, growth, and the government’s financing position.”
S&P Global further noted that, should Zambia’s external imbalances reduce materially faster than expected in tandem with faster growth than they currently expect, which could raise their GDP per capita trend growth forecast, upward momentum on the ratings could emerge.
“We have assigned a stable outlook to reflect a number of more positive developments that we expect will continue to reduce pressure on Zambia’s fiscal, economic, and external assessments. We still assess Zambia as being highly vulnerable to a reversal of these trends, despite the authorities implementing policies that aim to reduce macroeconomic susceptibility to such events. We have improved our economic growth forecasts and expect increased economic output will be supportive of corrective fiscal measures,” stated S&P.
And Minister of Finance Felix Mutati said the upgrading of Zambia’s sovereign rating by S&P from negative to positive with a stable outlook was an endorsement of President Edgar Lungu’s sound policies.
“This development rides on the basis of the critical reforms which we have embarked on as a country under the Economic Stabilisation and Growth Programme to implement fiscal consolidation, remove subsidies, reform the energy sector, and embark of diversification of the economy through agriculture development and industrialisation,” said Mutati.
“The result from the assessment conducted by S&P Global is a welcome incentive for investors as they should remain confident assured that this country is on track with economic stabilisation and growth. We will work diligently to ensure that the confidence of our people and that of investors in the good intentions of the government to stabilize and grow the economy are not taken for granted.”
Mutati reaffirmed that government would continue to pursue fiscal consolidation, economic stabilisation, and growth.
He maintained that the Ministry of Finance would remain highly alert on the need to reduce borrowing by enhancing resource mobilisation initiatives such Public Private Partnerships, increasing grant-inflows, and reinforcing tax-related initiatives which are targeted at strengthening enforcement and compliance.
About Mukosha Funga
Mukosha Funga is a Zambian journalist interested in good governance and anti corruption reporting.
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