Tag: credit rating

Fitch’s Downgrading of Zambia to B minus; with Negative outlook

Fitch’s Downgrading of Zambia to B minus; with Negative outlook


Good morning ladies and gentlemen from the press. Welcome to today’s Press Briefing. This briefing looks at the recent downgrading of the Zambian economy by a rating agency, Fitch Ratings, and the accompanying ramifications.
Fitch Ratings Inc. is amongst the top three credit rating agencies in the world – the other two being Moody’s and Standard & Poor’s. Within the context of globalised capitalism, these rating agencies provide investors with surveillance information on the ability of corporations and countries to pay back debt or to default. They are therefore a critical and highly influential mechanism in shaping global financial markets and decision-making. Their findings and ratings deserve serious attention.
The Socialist Party has spent time to scrutinize Zambia’s sovereign ratings from the top three rating agencies from 2010 up to now. We have made comparisons of these ratings with peer countries. Further, we took interest in the econometric model applied by Fitch and the recent adjustments made to this model by the in-house rating’s committee. We then took another look at the 2019 National Budget presented before Parliament by the Minister of Finance, Margaret Mwanakatwe, on the 28th September 2018 and how the budget targets influenced the modeling. This approach allows us to take an informed position on Fitch’s latest negative rating of the Zambian economy.
1. The Socialist Party views the latest downgrading of Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from “B” to “B minus”, with Negative Long Term Outlook, as a reflection of continued downward economic process. The chances of stopping this downfall are becoming minimal each year. Therefore, the risk of default on external and domestic credit obligations is real and highly possible in the medium-term.
2. Public debt is the most important impediment to attaining macro-economic stability. Earlier in this year, the government revised its external debt stock up to USD8.7 billion from USD7.9 billion. By the time the 2019 Budget was being presented the level was further adjusted to USD 9.4 billion. These constant revisions reflect immense deficiencies in public financial management as well as unplanned, rapid accumulation of new external debt.
3. The Ministry of Finance is well aware of the high risk of debt distress and the need for fiscal consolidation. In June this year, it released a Statement that indicated the government’s intention to curtail the contraction of new debt and to cancel some of the contracted but undisbursed loans. Despite the statement, the current Medium Term Economic Framework (MTEF) contains a total of USD3.4 billion in new external financing in the years 2019 to 2021, i.e. about 4.3% of GDP each year. This implies that debt servicing will consume approximately 24%
of government revenue during 2019 to 2022. The further expected increase in external debt will make Zambia’s debt stock more vulnerable to foreign exchange volatility given the globally increasing interest rate levels.
4. The contradictions between policy statements and the 2019 Budget are worrisome. Worse still, the lack of transparency and timely debt accounting information is being interpreted as a purposeful and highly dangerous attempt to conceal the real situation and levels of external debt contraction. The speculation in the international financial market is that Zambia may end up turn out to be worse than Greece and Mozambique in debt concealment. Yet the PF government does not seem to be in a hurry to rectify this perception.
5. The previous MTEF was more ambitious on fiscal consolidation than the current one. It had set the fiscal deficit target at 3% of GDP by 2010. The current one puts it at 5.1% by 2021 and 6.5% for 2019. This obvious admission of inability to reduce fiscal deficit has weakened the credibility of the government’s fiscal targets and weighed greatly towards the negative rating of the Zambian economy.
6. The 2019 Budget introduces some tax reform measures in order to increase revenue. These measures include updating the rules on tax deductions and transfer pricing, increasing the withholding tax, increasing mineral royalty rates by 1.5pp across all brackets and adding a new top bracket. According to the Fitch findings, these measures could help to marginally increase government revenue, but not by enough to counter the expected increase in capital expenditure. Fitch forecasts a deficit of 7.5% of GDP in 2018 and 6.9% in 2019. The agency also believes that the risks are tilted to the downside. The Socialist Party agrees with this conclusion.
7. Zambia’s performance on governance indicators continues to deteriorate. High levels of corruption, lack of accountability and misallocation of resources and poor priority setting are contributing to the dilemma. The current standoff with and withdrawal of funding by some cooperating partners has worsened the situation put downward pressure on the ratings.

What are the implications of the poor ratings and deteriorating macro-economic conditions?

1. The rating puts Zambia in an awkward situation. It implies a degrading financial situation, highly speculative bond issuance and serious concerns that debt will not be paid (i.e. junk status).
2. Any future external borrowing on the financial market will carry very high costs. This will in turn make repayment difficult.
3. The government will most likely turn to the Zambian masses to pay back the debt through increases in personal income tax, value added tax, exercise duty that targets the consumers plus user charges. Zambians will therefore have to pay back the external debt contracted recklessly.
4. The current account deficit will continue to widen. This will continue to increase the demand for foreign currency and put pressure on the Kwacha. The stability of the kwacha cannot therefore be guaranteed.
5. Some short-term liquidity injection will be needed merely to stabilize the Kwacha. Without a deal with the IMF, it is hard to imagine how this cash can quickly be secured without further exacerbating the debt situation and deterioration of the Kwacha. A deal with the IMF and an austerity programme would however make a PF government, that is increasingly losing popular support and internally divided, more vulnerable. The possibility of losing the 2021 elections would be high. As things stand, the PF government would rather sacrifice the Zambian economy than lose political power. The situation is desperate for the country’s petty bourgeois leadership.
6. The Socialist Party projects that gross international reserves will continue to deteriorate. Three months of import cover will be difficult to sustain. At these low levels of international reserves, any negative changes affecting the country’s ability to earn foreign exchange would entail a disaster for the economy. It is a precarious situation.
7. The chances of outstretching monetary policy and instruments to leverage macro-economic stability are unlikely. In the absence of robust fiscal reforms, the Zambian economy is in free downfall.

What should the government do?

A. The first thing is to own up that the economy is in great danger and that the livelihoods of millions of Zambians are at stake.
B. The PF Government must also acknowledge that their policies and actions to-date have greatly contributed to the difficult situation the economy finds itself in. In trying to provide solutions, some reversals of current policies and programmes are necessary. It cannot be “business as usual”.
C. The economic crisis is a national disaster of high magnitude. A non-partisan approach is urgently needed. All Zambian stakeholders, including workers’ representatives, peasant associations, academia, political parties and movements representing the masses of our people have to be engaged in building consensus on the options for saving the economy from total collapse.
D. There is need to immediately win back the trust of the Zambians and international finance markets that the PF government can still be entrusted on the helm of the economy for another three years. The actions for gaining this trust would include: (i) Cutting the allowances of the top leadership by 50%; (ii) Reducing the costs of international travel by 50-60%; (iii) freezing of midterm gratuity for parliamentarians; (iv) reversing the recently announced increases in salaries of the President and other constitutional position holders; (V) Forgoing the purchase of a new Presidential jet; (vi) cutting the cost of running the government fleet by at least 40%; (vii) cutting the bill for workshops and conferencing by 70%. Further, these measures would be supported by concreter governance measures that would point to a zero tolerance approach towards corruption.
E. Once the trust building measures have been enacted, the government ought to immediately embark on the restructuring of external debt. The aim would be to contract cheaper bi- and multilateral debt that would help pay off the more expensive commercial debt. The socialist Party reckons about 30% of the current debt stock can be addressed through this approach.
F. The socialist party also recommends that external debt contraction and sustainability be a constitutional responsibility under close parliamentary scrutiny. There is need to embark on developing a legal framework that would constrain a sitting government from incurring unsustainable debt levels that have potential to destroys the entire economy. There are several international examples in this regard.