Economist Chibamba Kanyama says government needs to take a very serious approach to embark on unfettered fiscal consolidation following Fitch Ratings’ credit downgrading of Zambia’s economy to ‘B -‘ from ‘B’.
Fitch Ratings downgraded Zambia’s credit rating last Thursday to ‘B -’ from ‘B’, and maintained the country’s economic outlook to negative, mainly triggered by government’s substantial upward revision in the budget deficit targets.
Reacting to the development, in an interview, Kanyama said the ‘B –’ rating simply called for a revision of a country’s deficit projections so that they were more ambitious than before to signal to investors that the economy will protect the debt assets.
“Rating agencies, such as Fitch, usually look at a country’s asset quality to determine long-term prospects. Investor focus on Zambia has been significant in the past five years following the exposure to Eurobonds. We have also had investors participating in government securities for many years and these also rely on rating agencies to make investment decisions. We also have potential creditors to Zambia who eagerly follow the quality of the existing debt assets. The current rating for Zambia calls for a very serious approach on the part of government to embark on unfettered fiscal consolidation. In simpler terms, Fitch is worried that government is not showing much commitment that it will in future begin to reduce the deficit. The worry is that government had shown that it is not in a position to reduce the fiscal deficit to the earlier projected 3 per cent by 2020 as the new projection is 5.1 per cent of GDP,” Kanyama explained.
“I know government is being realistic on these projections given the expected low level of economic growth and high debt build-up, but I believe we can do more to bring the deficit down to at least 4.5 per cent, especially if the new mine taxes succeed. A higher government deficit affects the quality of government assets, increases uncertainty on the fiscal status of the economy with regards to financing options for the deficit and reduces the country’s potential to expand the economy. The ‘B –’ rating simply calls for a revision of a country’s deficit projections so that they are more ambitious than before to signal to investors that the economy will protect the debt assets. How should this happen? Most investors are expecting nothing less than an IMF programme. They believe Zambia is facing a difficult macroeconomic and financial terrane induced by large fiscal imbalances, slowing growth (currently projected to be about 4 per cent in 2018), and huge interest payments on debt.”
He said government’s growing payments on arrears and very high interest rates was affecting asset quality and negatively impacting the economy.
“The growing government payments on arrears and very high real interest rates are affecting asset quality. The Ministry of Finance has admitted these challenges exist, hence the austerity measures announced sometime this year. The Minister of Finance has also assured the nation that she will be engaging the IMF during the October Annual Meetings to help send a ‘positive message’ about Zambia. That positive message from the IMF will only be on the basis of an indication that programme talks will resume soon. However, knowing the IMF, they may just be available for a courtesy call without concrete agreements on the resumption of programme negotiations. They will deliberately push the ball into the court of the Government of Zambia; asking government to prove commitment on some of the austerity measures,” Kanyama observed.
“Their first question will most likely be, ‘since you announced austerity measures, what has worked; what indicators can you show us that the deficit is being managed; new debt contraction has ceased and data is pointing to a reducing debt-GDP ratio?’ IMF is not a political organisation, so, no persuasive words can sway them away from the hunger for data. The only language IMF understands is data. By the way, unlike what has been widely communicated, investors are generally not moved by sentiment by private citizens. Their focus is on fundamental developments of the economy, such as the debt position, fiscal consolidation efforts, economic performance, foreign reserves, and decisions government is making or not making to redress any such challenges. Of late, they have eagerly anticipated detailed communication on government’s debt restructuring efforts.”
He said government’s hesitation to communicate the economic performance to investors sent a negative narrative, which would further have impact economic growth.
“When government does not say something on what the investors are expecting, investors make [their] own conclusions, usually not favourable. When the Ministry of Finance website was down mid this year, investors took that as negative sentiment; that government was hiding something when it was a genuine technical challenge. I am at the moment pleased government is showing strong signs of reading the economic situation and taking steps to redress them in a practical way. The technocrats in government are competent enough to advise on best options for the country and the Minister of Finance should do well to allow these advisors to operate professionally. It is through a reality check, proper diagnosis of the economic challenges that we can practically restore confidence to the Zambian economy. That takes focused leadership,” said Kanyama.