Fitch Ratings has downgraded Zambia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'. Its foreign currency senior unsecured bond ratings have also been downgraded to 'B' from 'B+'. The Outlook is Stable.
Simultaneously, the Short-term IDR has been affirmed at 'B' and the Country Ceiling downgraded to 'B+' from 'BB-'.
The downgrade of Zambia's Long-term IDRs reflects the following key rating drivers :
- Government finances have deteriorated sharply. The authorities expect a deficit of 8.5% of GDP in 2013, against an expected deficit at the time of the budget of 4.5% and an average of 2%-3% between 2006 and 2011.
- A 38% increase in public sector wages will contribute to the deficit remaining elevated at 6.6% of GDP in 2014, based on budget figures announced in October 2013. Fitch forecasts that spending will over-run again in 2014, reflecting the cost of the wage increase and higher debt service costs.
- Fitch expects that wider deficits will place upward pressure on key debt ratios, and forecasts that gross general government debt (GGGD) will rise to 36.3% of GDP by end-2013, from 25.5% in 2011.
- Zambia's external position has weakened, despite robust foreign direct investment of 5.5% of GDP and running only a modest current account deficit of an estimated 2% in 2013. However, Fitch forecasts a deficit on the balance of payments, due to continued large outflows from the domestic private sector. This will put further pressure on reserves which are forecast to end the year at 2.3 months of import cover, adding to Zambia's external vulnerability.
The Stable Outlook means Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, a faster-than-expected and sustained fiscal consolidation, or a significant improvement in international reserves could result in a positive rating action.
Conversely, the main factors that could result in a negative rating action include a further deterioration in public and external finances, or a sustained and severe deterioration in the copper price.
Fitch assumes that GDP growth will remain robust averaging 7%, based on the assumption that copper production will increase to 1.6MT by 2017 from 0.8MT currently, in line with the government's projections.
Standard & Poor's yesterday revises Zambia's credit outlook from stable to negative.
Source: Fitch press release.
