Matthew Hill Lusaka
Standard & Poor’s (S&P) cut Zambia’s credit rating deeper into junk as it forecast the government would post a budget deficit far worse than previously estimated, adding to its debt burden. The rating was lowered to B, five levels below investment grade, from B+, with the outlook changed to stable from negative, S&P said.
S&P kept the rating unchanged about three months ago. The currency weakened to head for its lowest closing price since April 6, while bonds fell, pushing the yield on Zambian debt due in April 2024 to an all-time high.
Sliding copper prices have hurt Africa’s second-biggest producer of the metal, curbing economic growth and fuelling a 15 percent plunge in the value of the kwacha against the dollar this year. S&P estimates the budget deficit, on a cash basis, may reach 10 percent of gross domestic product (GDP) this year, higher than the government’s projection of at least 6 percent and the 7.7 percent shortfall forecast by the International Monetary Fund.
“Zambia’s fiscal position is markedly and negatively deviating from our previous expectations,” S&P said. “Financing this deficit will lead to increased external indebtedness and higher related interest costs.” Including debt payments, the budget deficit is forecast by S&P to reach 14 percent of GDP. The government might struggle to keep spending under control ahead of elections in 2016, it said.
The kwacha fell 0.4 percent against the dollar to 7.54 as of 10.20am yesterday in Lusaka. Yields on Zambia’s $1 billion (R12.2bn) of 2024 notes rose for a fifth day, rising one basis point to 8.43 percent, a record high and compared with 7.12 percent at the end of last year.
Plans scaled back
The budget is under strain after President Edgar Lungu, who took office in January after the death of his predecessor Michael Sata, agreed to scale back plans to increase taxes on mining companies.
Government revenue from mining might be as much as 50 percent lower than budgeted because of sliding output and tariff uncertainty, S&P said.
The government has said it might sell as much as $2bn of eurobonds to help finance the deficit. That would boost Zambia’s net debt burden to about 50 percent of GDP, S&P said.
A weakening currency may also add to the nation’s debt burden. Fitch Ratings warned on June 29 that interest payments on debt might surge to 17 percent of government revenue this year, up from 8 percent in 2012. Fitch rates Zambian debt at B, the same as S&P. Moody’s Investors Service has a rating one level higher at B1.
“The vulnerability of the kwacha is a major issue on this front as a greater external debt load will mean currency risks become much more acute,” ETM Analytics analyst Gareth Brickman said in a note to clients. – Bloomberg