Fitch revises Zambia’s credit ratings outlook to negative
*The government’s decisions to reverse the privatisation of ZAMTEL and investigate the privatisation of ZANACO represent perhaps the most worrying recent development to investors.
*The government plans to issue a USD500m Eurobond later this year- total public debt will rise above USD2bn in 2012 or 22% of GDP.
*The greatest risk to government finances, over both the short and medium term, arises from a potential failure to curb current expenditure, particularly on wages, which consume 43% of government revenue, at the expense of capital spending needed to improve the long-term productive potential of the economy.
Fitch Ratings has revised the Outlooks on Zambia’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed both ratings at ‘B+’. Fitch has simultaneously affirmed Zambia’s Short-term IDR at ‘B’ and Country Ceiling at ‘BB-‘.
“The revision of Zambia’s Outlook to Negative reflects the agency’s concerns about some of the government’s recent actions and announcements, which bring into question the direction of economic policy,” says Carmen Altenkirch, Director in Fitch’s Sovereign ratings group. “The recent decision to reverse a privatisation deal without as yet compensating the investing parties could undermine property rights, while planned reforms of the mining and banking sectors could risk unintended consequences in terms of their potential impact on
investment, and consequently on the growth outlook and macro-economic stability,” added Ms Altenkirch.
The authorities’ intentions to implement reforms fight corruption and reverse perceived flawed decisions made by the previous administration are creditable, but in Fitch’s view the speed and direction of current policy making increases the risk of policy mis-steps. However, Fitch is aware that policy direction may moderate as the government assesses market reaction to its initial decisions.
The government’s decisions to reverse the privatisation of ZAMTEL and investigate the privatisation of ZANACO represent perhaps the most worrying recent development.
A further concern surrounds a recent announcement by the Central Bank to significantly increase the minimum capital requirements for the banking sector.
Although the government’s objective of increasing the size and capitalisation of the banking sector is laudable, Fitch is concerned about the potential impact on asset quality, inflation and foreign bank participation in the sector. Comments from senior government officials about the possible re-introduction of the contentious windfall tax as well as increasing the government’s stake in all mines to 35% highlight a further area of significant policy uncertainty.
Zambia’s economic performance has continued to improve over the past decade, with growth averaging 5.4% over the period and 6.8% during the past five years, well above the ‘B’ median. The economy has benefited from a more stable macroeconomic policy environment, an improved business climate, as well as a rapid increase in copper prices, which has underpinned rising foreign direct investment in the mining industry. The prospects for growth beyond 2012 are less certain. Growth in mining production could be constrained by weaker growth in
China, Zambia’s main export destination, as well as persistent capacity constraints.
However, if the new Patriotic Front (PF) government’s policy framework ultimately remains broadly unchanged from that of the previous government, with a continued focus on sound monetary and fiscal policy, as well as continued efforts to improve the business environment, a more favourable medium-term growth outlook is possible.
The budget for the 2012 fiscal year, released shortly after the new government came into power, reflects a slightly more expansionary stance. The deficit is expected to widen to 4.4% of GDP in 2012, up from 3.1% in the previous fiscal year. The government forecasts a material reduction of the deficit in 2013, falling to 1.2% of GDP, but Fitch views this target as optimistic, given that constraining current expenditure while dramatically improving the tax take is likely to prove challenging. As a result, Fitch currently forecasts a deficit of 2.2% for 2013. The greatest risk to government finances, over both the short and medium term, arises from a potential failure to curb current expenditure, particularly on wages, which consume 43% of government revenue, at the expense of capital spending needed to improve the long-term productive potential of the economy.
The government plans to issue a USD500m Eurobond later this year, which will be used to fund investments in road and energy infrastructure. As a result, total public debt will rise above USD2bn in 2012 or 22% of GDP. Additional borrowing, particularly at non-concessional rates, needs to be invested in projects with a
high economic rate of return.
Fitch will continue to monitor the government’s actions and policy announcements closely over the next 12 months. Any crystallisation of Fitch’s concerns over policy direction that leads to a weaker investment environment with negative implications for growth would likely result in a downgrade of the ratings.
Conversely, evidence of a fiscally responsible policy framework, growth-supportive infrastructure investment and progress on deficit reduction in line with targets could result in a revision of the Outlook to Stable.