by Malidi Msoni-Chatora
Moody’s Investors Service on 26 January 2018, upgraded Zambia’s rating outlook from negative to stable. This is on the back of the country’s recent gradual progress with fiscal consolidation which has helped to cap borrowing needs and public debt accumulation, slowly restoring some amount of policy credibility.
What does this upgrade in the rating outlook mean for Zambia?
In order to answer this question, it is important to understand that investors often rely on credit ratings to assess a country’s ability to meet interest and principal repayments on debt, in a timely manner. This ability is generally judged by how much revenue a country has to service its debt. The higher (lower) the rating, the more (less) likely a country is to repay and service its debt. A country with higher credit rating is likely to attract more investors than one with a lower rating. Credit ratings therefore form an important part of the decision to invest and are an essential driver of foreign investment flows.
The stable outlook is likely to have a positive impact on Zambia’s ability to compete for and attract FDI, as it reflects some macroeconomic improvement. Fiscal consolidation has started to pay-off as seen in the reduction in the fiscal deficit from an estimated 8.6% in 2016 to 6.1% in 2017. A smaller deficit combined with more stability in the exchange rate and inflation has given room for monetary easing. Cuts in the Policy rate from 15.5% to 11% and the Statutory Reserve Ratio from 18% to 9.5%, in 2017 helped to ease liquidity pressures in the banking sector.
Further, the Government is expected to get some relief from expenditure pressures owing to the reduction in electricity and fuel subsidies, and reforms in farmer subsidies. In 2017, the Government is reported to have settled expenditure arrears worth 3% of GDP. Fiscal revenues are also expected to rise gradually over the medium term from around 16% of GDP in 2016 to 18% in 2020, on the back of higher copper prices and production, and structural tax measures such as the continued automation of revenue collection. These improvements are likely to improve investor confidence and FDI flows.
However, the upgrade in the rating outlook is far from favourable as it maintains the country’s classification in the high credit risk category. Zambia continues to face a number of credit challenges. Even though Zambia’s debt burden has improved moderately, a significant portion of this debt is foreign currency denominated, which leaves the country open to currency risks should the Kwacha depreciate. Moreover, the large external debt maturing in 2022, 2024 and 2027 will escalate Zambia’s financing needs if the debt is not refinanced ahead of schedule.
If Zambia has to see any further upgrades to its credit rating, the country needs to remain steadfast with its macroeconomic policy and governance efforts, especially on the fiscal policy front. Limiting expenditure overruns, increasing domestic resource mobilisation and reducing the fiscal deficit further, will give more confidence in Zambia’s ability to repay and service its debt.