Sunday 11, February 2018 by Matthew AmlĂ´t

Moody's changes outlook on Zambia's B3 rating to stable from negative, affirms rating

Moody's Investors Service, (Moody's) has changed the rating outlook for the Government of Zambia to stable from negative and affirmed its B3 long-term issuer rating.

The stable outlook reflects reduced government liquidity pressures and a slowdown in government debt accumulation which Moody's expects to continue.

The B3 rating balances a strong growth potential boosted by ample natural resources and a young and growing population against continuing credit challenges which include a moderate debt burden, though with a significant share denominated in foreign currency, low debt affordability, and risks of delays in implementing further fiscal consolidation plans. Other challenges include sizeable funding requirements, a rising reliance on external debt including for local currency government securities and large Eurobond maturities due early in the next decade.

Zambia's foreign- and local-currency bond ceilings remain unchanged, with the long-term foreign-currency bond ceiling at B1, its long-term foreign-currency deposit ceiling at Caa1, and its long-term local-currency bond and deposit ceilings at Ba2.
The government's gradual progress with fiscal consolidation is helping to cap borrowing needs and gradually restore policy credibility. As a result, the pace of increase in government debt from 2014 to 2015 is not expected to repeat. Evidence of fiscal consolidation, together with a favourable commodity price environment, foster stability in the exchange rate allowing the central bank to ease monetary policy. In turn, this contributes to support liquidity in the banking sector.

Moody's estimates that in 2017, Zambia's fiscal deficit (on commitment basis) fell to 6.5 per cent of GDP, down from an 8.6 per cent deficit in 2016. With the total deficit (including interest payments) being the main source of funding pressures over the past few years, the gradual reduction in the fiscal deficit alleviates liquidity pressures and has supported an easing of monetary policy.

Moreover, elimination of the electricity supply gap (which the country's energy minister estimated at around 1,000 MW, or about half of the country's needs during its peak in early 2016) lowered costly electricity imports funded by the government while fuel subsidy reform and currency stability have reduced the government's subsidy bill. The government has also reduced farmer subsidies, raised retail power tariffs by 75 per cent, increased the tariff for mines, and is phasing out the fuel distribution business entirely. Overall, these amount to savings of around two per cent of GDP relative to the 2016 outcome.

These measures contribute to reduced pressures for spending overruns and also help the government in reducing its expenditure arrears, accumulated mostly in the aftermath of the copper price shock in the period 2015 to 2016. In 2017, arrears worth three per cent of GDP were settled.

Moody's expects that fiscal revenues will gradually rise over the medium term, to around 18 per cent of GDP in 2020, from around 16 per cent in 2016, supported by higher copper prices, higher copper production and structural tax measures. Such measures are likely to include steps towards implementation of more effective tax regimes and tighter incentives for compliance. Combined with fiscal measures to rein in expenditures, the fiscal deficit will continue to fall and reach 5.7 per cent of GDP in 2018 and five per cent in 2019.

Moreover, the government has implemented a new public financial management act and established control over non-concessional borrowing, reducing the risk of liquidity pressures going forward. In particular, all new non-concessional borrowing has been suspended since November 2017 unless approved by Cabinet while the government has also embarked on preparing the Treasury Single Account to reduce future arrears occurrences. Moody's expects the remainder of the government expenditure arrears to be cleared by 2020.

Overall, Moody's expects that gross financing needs will be contained below 15 per cent of GDP and gradually subside, facilitating further easing of liquidity pressures.

With ongoing, albeit gradual, fiscal consolidation, and robust nominal GDP growth, government debt will rise very gradually as a ratio to GDP, remaining around 60 per cent of GDP over the medium term. Moody's projects real GDP growth above four per cent in both 2018 and 2019, and nominal GDP growth at around 13 per cent, supported by a robust global growth environment and demand for copper and an easing of some domestic structural bottlenecks including in power.


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