Africa’s second largest copper producer, Zambia was today 23 August downgraded to CCC+ with stable outlook by Standards and Poor’s rating agency. Both the long term foreign and local currency ratings were lowered in credit assessment to CCC+ from B-. This comes a month after Fitch lowered the copper producers credit assessment lower to CCC. Earlier in the year Moody’s rated Zambia Caa2 from Caa1.
Zambia currently grapples with energy generation bottlenecks that has seen rolling black outs across the sectors which has impacted business pulse. Rising external debt fueled by infrastructure spend and ballooning domestic arrears are key concern. Hydrological risks have also impacted crop yield putting pressure on maize prices which is inflationary. Risks to growth are elevated and growth forecasts have been trimmed lower to between 2%-2.5% by the IMF/World Bank and Ministry of Finance. Currency risks remain high given the falling reserves to $1.4billion (1.6 months of import cover).
The central bank despite tightening monetary policy 50bps to 10.25% have managed liquidity aggressively to curb currency pressure, however this has suppressed private sector growth that has slid into contraction for 10 months in a row as measured by purchasing managers index.
Other factors reviewed were widening fiscal deficits and delays in locking in an IMF deal for balance of payment support. Zambias credit default spreads have widened significantly to above 1,350bps reflecting waning confidence.
Given the fiscal posture of the counterparty (Zambia) and the balance sheet vulnerabilities S&P decided to lower the credit assessment of Zambia citing risks to growth and vulnerabilities to external shocks.
BT Research Team