Fitch Ratings has upgraded Zambia's Long-term Local-Currency (LTLC) Issuer Default Rating (IDR) to 'CCC' from 'CC' and has affirmed Zambia's Long-Term Foreign-Currency (LTFC) IDR at 'RD'.
A full list of rating actions is below.
KEY RATING DRIVERS
The upgrade of the LTLC IDR reflects that the government has continued to service its local currency debt and has made no indication that it plans to include domestic debt in any potential debt restructuring. This means an eventual re-structuring of external debt could improve the overall public finance position and support local-currency debt sustainability.
However, the 'CCC' rating still reflects a real possibility of a local-currency default, given Zambia's weak public finances and tight domestic financing conditions. Fitch estimates the 2020 general government deficit widened to 12% of GDP and forecasts a 2021 deficit of 10.3%. General government debt reached an estimated 114% of GDP at end-2020, versus the current 'B' median of 66%. The need to roll over domestic debt has increased interest rates. The government's weighted-average cost of domestic government bond issuance reached a real rate of 11.7% in February, when inflation was 22%.
Zambia's LTFC IDR of 'RD' reflects that the government has not serviced its outstanding Eurobonds pending a restructuring since its failure to pay the coupon due 14 October 2020 on its USD1 billion Eurobond that matures in 2024. The government has continued to service foreign currency-denominated debt to multilateral financial institutions and debt on a few priority projects that have immediate social and economic impact.
The Government of Zambia officially requested debt treatment under the G20 Common Framework in February 2021, and began discussions with the IMF on a possible support programme. Debt treatment under the common framework is likely to be driven by the outcome of a debt sustainability analysis (DSA) prepared by the authorities with the IMF and the World Bank.
An IMF statement on 3 March noted broad agreement on the "nature and cause of macroeconomic imbalances," but that key challenges remain in addressing those imbalances. Given that an IMF programme will require significant policy adjustments, we believe that final approval of a programme is unlikely before the 2021 general election that is currently scheduled for August.
ESG - Governance: Zambia has an ESG Relevance Score of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Zambia has a medium WBGI, in the 38th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
ESG - Creditor Rights: Zambia has an ESG Relevance Score (RS) of 5 for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. Zambia has not serviced its outstanding Eurobonds since its failure to pay the coupon due 14 October 2020 on its USD1 billion Eurobond that matures in 2024.
