The central bank in Africa’s red metal producer, provided monetary stimulus measures to cushion against COVID shocks by throwing a K10billion life-line to commercial banks in a 3-5 year Medium Term Emergency Lending Facility (MLTF). In addition to this, the Bank of Zambia eased capital and provision rules to allow for financial institutions take more credit risk in a growth suppressed environment. Zambia is forecast to recede 2.6% in 2020 (IMF) as disease pandemic effects weigh the copper producer. Other responses from the fiscal side include tax easing measures on penalty and interest for transactions in the pandemic period in addition to suspension of levy and customs on medical equipment.
Downgrade risk widens for Zambia. Fitch rating agency lowered Zambia’s credit assessment to ‘CC’ from ‘CCC’ citing disease pandemic effects amplifying already existing fiscal vulnerabilities. The downgrade followed a two weeks after Moody’s had downgraded Zambia’s long term issuer rating to ‘Ca’ with stable outlook from ‘Caa2’ with stable outlook. Standards and Poor’s earlier in the year trimmed the red metal producers rating to ‘CCC’ from ‘CCC+.’ There still exists latitude for further downward adjustments given deteriorating conditions.
Much as credit rating downgrades price into liquid debt on the international capital markets to widen credit default (Z) spreads, there are more severe consequences that most pay a blind eye to, implications of credit appetite of commercial banks. Today Zambia’s dollar bonds are the worst performing of emerging and frontier market bonds priced as high as 46% for bonds maturing in 2022. Every downgrade triggers model adjustment that translates into declines in credit appetite. What does this mean? Commercial banks will allocate less capital and liquidity towards taking risks in key sectors of the economy. Do governments know that their actions have such far fetching implications? That’s the reason we are reminding them. However credit models are not standard or homogenous in the Zambian market which is an area the regulator needs to level the playing field. International banks are more likely to adhere to international best practice and as such their rating models will reflect sovereign risk and provisioning models compared to local banks that still use outdated risk models. In this era of deteriorating credit conditions and forward looking accounting models such as IFRS9, markets can ideally expect to see higher impairment stocks in the COVID era where stress is forecast.
Did central bank stimulus come too late? The central banks commitment to providing liquidity buffer for COVID shocks through a K10billion life line to FI’s is well in good faith while the pricing is fairly attractive at 100bps above BPR yet waning credit appetite could cap the actualization of their intent. Lending to sectors that are directly affected by pandemic strains is not an easy science in a suppressed environment. Mining, public sector, SME, construction and agriculture have become risky faculties in forward looking views which require banks to hold more in provisions given toughening conditions excarcabted by credit rating downgrades.
It’s the first quarter earnings season and is very highly unlikely that the numbers will be impacted by disease pandemic. We anticipate that second quarter numbers will reveal higher impairment effects and slower growth in earnings as FI’s set aside buffers for disease pandemic strain. We remain of the view that capital and provisioning rules relaxation came 2-3 years late given that Zambia’s credit risk environment started to deteriorate during the 2015 energy crisis a period in which the central bank should have started to ease regulatory requirements which by now would have supported counterparty’s. Scrapping of Statutory Instrument No.142 is welcome but came a little too late when credit appetite had been eroded by sovereign rating downgrades.
There is a limit to which commercial banks can lend in a stressed environment given the constrained appetite exacerbated by the declines in sovereign risk ratings. This could impede or limit actualization of the monetary stimulus the central bank announced.
The Kwacha Arbitrageur
