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Fitch Ratings has affirmed Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘RD’ – restricted default, indicating that the country has defaulted on one or more of its obligations.
According to the rating note, Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDR at ‘CCC’. The rating note states that Zambia still in external debt default. The ‘RD’ rating reflects that Zambia has not serviced the bulk of its outstanding external debt since failing to make a Eurobond interest payment in October 2020.
Subsequently, the government announced that it would stop servicing all of its external debt, excluding some priority project loans, and applied for debt relief under the G20 Common Framework (CF).
In December 2021, the government reached staff-level agreement on an IMF programme, which clears the way for the convening of an official bilateral creditor committee to discuss potential debt treatments.
The affirmation of Zambia’s ‘CCC’ LTLC IDR reflects that the government continues to service its local-currency debt, according to the rating note.
Zambia has secured staff-level agreement with the IMF on a USD1.4 billion Extended Credit Facility (ECF) and has conducted an IMF/World Bank Debt Sustainability Analysis (DSA).
The DSA will be the basis of discussions within the creditor committee. The outcome of the creditor committee will be enshrined in a memo of understanding (MOU) outlining a proposed debt treatment.
Fitch said Zambia will then approach its private creditors to negotiate debt treatment on comparable terms. The government’s announced timeline anticipates the formation of the creditor committee, agreement with private creditors, and final IMF Board approval of the ECF all within 1H-2022.
Fitch believes that this timeline is optimistic. Disagreements among official creditors or prolonged negotiations with private creditors could push the date of an eventual agreement back into 2H-2022 or 2023.
Sizable Debt Treatment Needed: Fitch believes that a sizable debt treatment will be necessary to bring Zambia’s debt to a level deemed sustainable by the IMF and Zambia’s creditors.
Total public sector stood at 108% of GDP at end-2021 and we expect it to fall below 100% by 2023, as Zambia narrows its primary deficit.
However, Fitch analysts forecast debt to increase to just under 500% of government revenue in 2022, above the ‘B’/’C’/’D’ median of 328%. Of this amount, USD14.7 billion (59% of GDP) is external debt.
Eurobonds account for USD3 billion of Zambia’s debt, a high percentage of debt compared to other countries going through CF restructuring. The possibility of Eurobond holders rejecting the MOU’s terms brings risks to the timeline.
Zambia has an additional USD4 billion in contracted but undisbursed debt, which is not included in the debt stock. Fitch expects about half of this contracted debt to be negotiated away.
Local Currency Rating Affirmed at ‘CCC’: The ‘CCC’ rating reflects that the government has continued to service its local-currency debt and has not announced any plans to restructure domestic debt as part of the CF.
Domestic banks and other institutions hold the majority of outstanding domestic debt; although the stock of non-resident investment increased in 2020 and 2021 and is now 28% of the total. A domestic debt restructuring could create additional liabilities to the government, making it counterproductive.
However, the domestic debt stock is large at ZMW197 billion (48% of GDP). The size of the necessary overall debt treatment, as well as the size of the necessary fiscal adjustment, mean that sizable risks to domestic debt will persist.
Reserves Stable but Will Decline: A combination of higher copper export receipts and financial account inflows have improved Zambia’s international reserves position.
“We forecast reserves to reach USD2.9 billion, or 3.6 months of current external payments (CXP) at end-2022, up from 3.4 months of CXP at end-2020”, Fitch said.
The global rating agency added that if the International Monetary Fund (IMF) Board approves the ECF, disbursements from the IMF and other multilateral lenders would further bolster reserves.
However, it said higher import prices will contribute to a narrowing of the current account surplus in 2022 and the eventual resumption of debt servicing will contribute to falling reserves in 2023.
Inflationary Pressures a Macro-Fiscal Risk: Fitch analysts estimate real GDP growth of 3.3% in 2021 and expect medium-term growth of approximately 3%.
Inflationary pressures will increase along with high global commodity prices, as the government has ended its explicit fuel subsidy as part of its IMF programme.
However, fuel prices are still regulated by the government and the government could delay hiking fuel prices, with resultant losses falling on its balance sheet. The government will also face higher costs for its fertiliser subsidies through the Farmer Income Support Programme.
The need to tighten monetary policy would put additional pressure on domestic government borrowing. The government’s increased call on domestic debt markets has crowded out private sector credit, which we forecast to remain in negative real terms in 2022.
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