Moody’s Points To Weak Government Effectiveness In Handling Debt Challenge
International ratings agency Moody’s yesterday released its latest annual report on Zambia to the market. Top of the update was reference to “unsustainable debt dynamics”. The agency noted that Zambia’s “credit fundamentals will likely remain very weak for the foreseeable future.”
Moody’s said that Zambia’s weak credit profile means that debt restructuring is likely to address debt sustainability challenges. It also wrote that debt affordability is deteriorating and refinancing risks are rising amid weakening financing conditions.
“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," said Daniela Re Fraschini, a Moody's AVP-Analyst and the report's co-author.
The report notes that the fiscal deficit once 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.”
“The 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. Moody's expects the persistently large budget deficit and exchange rate depreciation to push the debt burden above 110% of GDP this year,” a release on the report stated.
Government last month confirmed the appointment of French firm Lazard Freres for advisory services relating to liability management of its debt portfolio.
Among the debts scheduled to mature in the coming months and years are the Eurobonds, which will see around US$750 million debt mature in 2022, followed by US$1 billion in 2024 and US$1.25 billion between 2025 and 2027.
Lazard Freres was selected from a list of six bidders and the contract will be worth a maximum of US$5 million for work done over a period of three years.
In February of this year Minister of Finance Bwalya Ng'andu confirmed that external debt stock continues to rise and now stands at US$11.2 billion. The debt has increased almost 6-fold from just US$1.9 billion in 2011.
Cabinet recently approved plans to issue a Covid bond to the value of K8 billion as a means of financing economic stimulus. Zambia’s estimated revenue for 2020 is predicted to fall by at least 20%, or K14.8 billion, as a result of Covid-19, Finance Minister Bwalya Ngandu has previously stated.
The government has asked the Paris Club of creditor nations to suspend principal and interest payments on its debts to all official creditors until the end of December.
Zambia has been listed among countries eligible for debt relief under the Debt Service Suspension Initiative, which aims to help nations respond to the health challenges and economic shocks of the Covid-19 pandemic.