Zambia‘s very weak credit profile (Ca stable) reflects “unsustainable debt dynamics and heightened liquidity,” Moody’s Investor Service said this month. The global ratings agency in an annual report also stated external vulnerability pressures in the context of exceptionally difficult global conditions will hit the country’s credit fundamentals, which will likely “remain very weak for the foreseeable future.”
“The weaknesses in Zambia’s credit profile have left it extremely vulnerable to acute risk aversion and a prolonged period of low commodity prices linked to the coronavirus,” Daniela Re Fraschini, a Moody’s AVP-Analyst and co-author of the report said. “This increases the likelihood of a sovereign debt restructuring to address its debt sustainability issues.”
Zambia’s fiscal deficit again exceeded the budget target in 2019, largely because of higher than planned interest payments and capital spending, as well as support for the farming sector. The fiscal slippage will continue in 2020 because of the coronavirus pandemic, while debt affordability continues to weaken.
Slippage and accumulation of arrears underscore Zambia’s “weak government effectiveness” which has prevented quick and decisive policy action to confront the challenges stemming from rapidly increasing debt. The agency expects the persistently large budget deficit and exchange rate depreciation to push the debt burden above 110% of GDP this year.
While debt restructuring has become Moody’s baseline scenario under these challenging conditions, the stable outlook on Zambia’s sovereign rating reflects a potential contrast in outcomes for private-sector creditors because of a re-profiling of some non-commercial debt could limit their losses.
Smaller losses for private-sector creditors than implied by the Ca rating as part of a debt restructuring could lead to a higher rating. Conversely, a lower rating would result from the increased likelihood of investors facing larger losses than implied by the Ca rating as part of a debt restructuring that Moody’s would consider to be a default under the rating agency’s definition