CREDIT RISK: Fitch rating agency on 27 June lowered Zambias credit risk assessment deeper into junk at CCC from B- with negative outlook. This is the second downgrade served on Africa’s second largest copper producer after Moody’s cut its rating to Caa2 with negative outlook from Caa1 with stable outlook. Credit risk appetite for Zambian financial institutions will have to realign lower as they adjust their credit risk ratings which could cap and limit their credit extension impacting private sector growth as banks play a key role in the economic growth equation. In developed nations where banks trade on exchanges and the regulator requires publishing of credit ratings of the the financial institutions, the likes of ABSA, Nedbank, Standard Bank and First National Banks in South Africa always realign their credit quality benchmark to their sovereign South Africa. However in lesser developed markets like Zambia and it’s peers this to some degree does happens.
A move like this then exerts pressure on interest income lines as a decline in credit extension means lesser loans and credit facilities thereby narrowing the earnings of the bank. It’s also entails higher spreads on lending rates making it more costly to lend as the cost of funds will rise. All things constant higher lending rates will increase the burden of repayment on counterparty’s which could threaten the credit impairment lines and non performing loans ultimately. Zambias NPL industry level as at 30 May was 9.98% (K3.28 billion: BOZ) just below the 10% threshold. Delving deeper into sectors, the mining is already trigger sensitive to the recent move to place Konkola Copper Mines (KCM) in liquidation while the sovereign downgrade makes the interest rate sensitive sectors very jittery. However the downgrade is merely an alignment to what was seen with the Moody’s assessment lowering to Caa2 (-ve outlook). However what is worrying is that with a credit standing of CCC it becomes very costly to raise dollar debt in the international capital markets. Zambias bonds are already elevated at levels above 16.5% the highest among frontier countries.
Monetary policy was tightened marginally as the benchmark interest rate was hiked 50 basis points to 10.25% to curb a currency slide, however with little latitude for stimulus on the monetary side yields on government securities remain elevated with 1yr and 5yr treasuries yielding 26.5% and 30.5% respectively. These two tenors set the pace for lending rates as no commercial bank would lend less than these benchmarks. The interest rate spiral risk remains real and is independent of the policy rate in the Zambian market.
DEPRESSED BUSINESS PULSE: With business confidence at 2.5 year lows private sector activity has been suppressed with lack of liquidity in the sector that has sent business pulse to lows of 43.9 (May) as measured by purchasing managers index (readings below 50 spell contraction while those above 50 are expansionary). February is the only month PMI printed above 50 at 50.3. For 8 months in a row Zambia has been in the contraction zone. There is urgent need for stimulus in the sector as this could weigh gross domestic product growth pulse. Other drivers of tough conditions have been increased minimum wages, higher fuel costs and general uncertainty around tax policy with the proposed sales tax to replace value added tax system.
OTHER RISKS: Other key risks to growth in the copper producer include: energy deficits to the tune of 273MW and drought effects threatening food security. The Chamber of Mines warned that mining productivity risks suffering a dent in 2019 given the recent developments in the sector.
Complied by Kondwani Phiri (BT Analyst)