Last week’s opinion focused on the outlook of Zambia’s path towards debt sustainability. The 2023 debt sustainability analysis shows that Zambia’s journey remains laden with challenges, with a Composite Indicator (CI) score of 2.59, placing the country in the ‘weak’ category of debt carrying capacity. This score suggests significant challenges in managing the country’s debt without substantial risks. This has had implications for Zambia’s credit ratings, as evidenced by the re-affirmation of the country’s ‘default’ credit rating on its long-term external debt by Fitch Rating at the end of 2023.

This week’s opinion takes a deeper dive into the linkages between the outlook of Zambia’s debt sustainability and its sovereign credit ratings. A sovereign credit rating is an independent assessment of the creditworthiness of a country. It indicates to investors whether a country will be able and willing to meet its debt commitments as they fall due without substantial risk. Credit rating is an important indicator for both investors and sovereign lenders because it shows the financial fitness of a country and influences the government’s cost of borrowing, investor confidence, and investment inflows, which are all key for economic growth and ultimately, improvements in debt sustainability.

Using debt sustainability analyses, major credit rating agencies like Standard and Poor’s (S&P), Moody’s, and Fitch evaluate countries’ creditworthiness. Although different rating agencies have different rating scales, the general ratings range from AAA (highest quality) to D (default). A high rating suggests low default risk, resulting in lower borrowing costs and better access to international capital markets. On the other hand, a low rating indicates higher default risk, leading to higher borrowing costs and challenges in attracting new investors.

On June 11, 2024, Zambia’s three Eurobonds were successfully exchanged for the two new restructured bonds. Following this, Fitch Rating upgraded Zambia’s short-term external debt (Eurobond debt) to ‘C’ from ‘default status’ by assigning a ‘CCC+’ rating to the two new bonds (A and B). However, Fitch Rating maintained that Zambia’s long-term external debt is still in “default” pending the finalization of the restructuring of the outstanding US$3 billion commercial debt. This improved rating on the Eurobond debt signals that the country is no longer a defaulter, but its ability to meet debt obligations is still highly dependent on favorable business, financial, and economic conditions.

Achieving a higher credit rating on both the country’s short and long-term debt would have several benefits for Zambia. Key among them would be improved access to international capital markets. Although Zambia’s medium-term debt strategy emphasizes the need to minimize the cost of borrowing by leveraging concessional external financing away from international capital markets, private financial institutions still stand to benefit these markets. With improved credit ratings, private financial institutions can access fairly priced capital due to narrower risk premiums, ultimately reducing the domestic cost of borrowing. They can also have access to more credit lines that can support environmental and sustainable projects, agriculture, mining as well as Small and Medium Enterprises (SMEs) to further promote economic diversification and growth.

Other benefits include increased investor confidence, which contributes to exchange rate stability and provides greater flexibility in fiscal policy and budget management. Furthermore, improved credit ratings are crucial for promoting a strengthened international reputation, fostering stronger relationships with international partners, and increasing the provision of grants to support budget implementation and ultimately sustainable economic growth.
However, there has been growing concern about the accuracy and fairness of ratings assigned by major international credit rating agencies, such as S&P, Moody’s, and Fitch particularly in how they rate African countries. Many African countries, including Zambia, are of the view that these agencies often overlook specific regional and economic contexts, leading to ratings that may not accurately reflect the true creditworthiness of countries. As such, there is a push for the establishment of an African Credit Rating Agency (ACRA) that would serve as an independent body focused on providing more accurate and contextually relevant credit ratings for African countries.

Therefore, as Zambia aims to restore debt sustainability and improve its credit ratings, it is crucial for the government to prioritize the finalization of the debt restructuring process. Additionally, it is important to prudently manage the country’s debt going forward including the implementation of reforms focused on fiscal consolidation and debt transparency. Lastly, Zambia should consider collaborating with other African countries to advocate for the establishment of the African Credit Rating Agency (ACRA). Such an agency could potentially lead to fairer borrowing costs and improved access to international capital markets, ultimately supporting the debt sustainability goals of Zambia and other indebted African nations.

About the Author: Peter N Mumba is a policy researcher and development economist currently coordinating the Zambia Debt Alliance. He holds a master’s degree in economics from the University of Namibia, along with additional qualifications in monitoring and evaluation and business information systems.