STANDARD and Poors (S&P) Global Ratings have lowered its long-term foreign and local currency sovereign credit ratings on Zambia to ‘CCC-‘ from ‘CCC’ following the Zambian government’s request to suspend Eurobond debt interest payments.
According to its latest ratings, S&P disclosed that it had lowered its long-term foreign and local currency sovereign credit ratings on Zambia to ‘CCC-‘ from ‘CCC’, with the country’s economic outlook revised downwards to negative, following the Zambian government’s request to suspend Eurobond debt interest payments, warning that the country was now at high risk of imminent debt default.
This means that Zambia’s credit rating has dropped on the back of the Zambian government’s appeal to bond holders to suspend debt interest payments on all its US $3 billion worth of Eurobonds, making S&P the second major internationally-recognised credit ratings agency to downgrade Zambia’s credit ratings within a space of just one week.
Last Thursday, Fitch, downgraded Zambia’s credit rating to ‘C’ from ‘CC’, while also downgrading the country’s ratings on its senior unsecured foreign-currency bonds, a development the ratings agency stated had now signalled that Zambia was headed for an imminent loan default, being the first African country to ask for debt suspension on its Eurobond debt.
“On Sept. 22, 2020, Zambia announced its intention to seek a temporary debt service moratorium from its Eurobond holders. Bondholders have been asked to respond to the request by Oct. 20. In our view, the request indicates that Zambia currently faces significant difficulties in meeting its commercial obligations and is a likely precursor to a default on commercial obligations. We are, therefore, lowering our long-term ratings to ‘CCC-‘ from ‘CCC’. The outlook is negative,” S&P stated.
It explained that Zambia’s downgrade meant that government would fail to pay its commercial obligations for the next six months.
“We also revised our transfer and convertibility assessment for Zambia to ‘CCC-‘ from ‘CCC’. The negative outlook indicates the likelihood that Zambia will not pay its commercial obligations over the next six months. We would lower the ratings within the next six months if and when the government fails to pay its commercial obligations, or announces its intention not to pay,” it stated.
“In our view, a default is extremely likely within six months unless there are significant and favourable changes to Zambia’s circumstances, or if Eurobond holders reject the deal and the government chooses to continue paying on time and in full. If commercial creditors, including bond investors, review and accept the changed terms, we would likely view the changes as a default, under our criteria.”
S&P, however, stated that it could revise its outlook back up to stable provided that the Zambian government remained current on its commercial obligations.
“We could revise our outlook to stable should Zambia remain current on its commercial obligations, and its external liquidity and fiscal positions improve over the next few months. This could occur if it saw a substantial increase in foreign currency reserves at the central bank,” stated S&P.
Investors have until October 20, 2020, to respond to Zambia’s ‘consent solicitation’ offer.
Zambia’s public finances are currently weak and fiscal consolidation has been further delayed by complications stemming from the COVID-19 pandemic.
Half of the country’s near-US $12 billion external debt stock is owed to private creditors, including US $3 billion of outstanding Eurobonds and private bank loans, while the other half is owed to official creditors, including export credit agency obligations, supplier credit and concessional debt from bilateral and multilateral sources.