Fitch Rates Zambia
Key Rating Drivers
●Foreign-Currency Debt Remains in Default: The ‘RD’ Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) reflects that Zambia remains in default on its foreign-currency (FC) government debt. The government stopped servicing its external debt in October 2020, excluding multilateral debt and some priority project loans.
Closing of Debt
● Restructuring Delayed: Following the agreement with the official creditor committee (0CC) on the restructuring of USD6.3 billion of official debt reached in June 2023, Zambia has sought private creditors’ claims treatment on comparable terms, but the October 2023 in-principle agreement with the steering committee of Eurobond holders has been rejected, delaying the closure of the Common Framework restructuring.
● Fitch Ratings expects Zambia to reach an agreement with private creditors in 2024.
No restructure for Local Debt
● LC Debt Excluded from Restructuring: The upgrade of the LTLC IDR reflects greater confidence that the debt-restructuring process will be completed and will exclude local currency (LC) debt from the final treatment.
The government has remained current on Local debt payments throughout the Foreign Currency debt-restructuring process, and Fitch estimates that an event of default on the LC debt is very unlikely by the near-to-medium term.
● Large Fiscal Consolidation: Fitch anticipates a continuation of the fiscal consolidation path that has already reduced the cash primary deficit by 6.3pp between 2020 and 2022.
● We expect the cash primary balance to reach a deficit of 0.6% of GDP in 2023, from 1.6% in 2022, and improve to a 0.7% surplus in 2024 followed by a 1.2% surplus in 2025.
● Falling Debt: Under our assumptions on the debt-restructuring parameters and kwacha appreciation following the closure of the debt restructuring, government debt would fall to 90% of GDP in 2024, from an expected 116% in 2023, and continue to decline to 80.5% in 2025.
● Since February 2023, authorities have implemented a 5% ceiling on non-resident participation to LC auctions, expected to be lifted after the end of the IMF programme, which aims to avoid abrupt entrances and exits of non-residents from primary LC market.
● Current Account Deficit: We expect the 2023 current account balance to be in deficit for the first time since 2018, at 2.8% of GDP, from a 3.7% surplus in 2022, on an end of commodity price boom and slump in copper exports.
● We anticipate the current account balance to return to a 0.5% surplus in 2024 and 0.6% in 2025. This would contribute, together with disbursements from international financing institutions, to a gradual increase in international reserves, to 3.6 months of current external payments in 2025 from an expected 2.9 months in 2023.
● Inflation to Taper: Delays in FC debt restructuring and a struggling mining sector have eroded confidence, pressuring the kwacha which has depreciated by 29% in 2023.
This partly fuels CPI inflation that we expect to average 14% in 2023, far from the 6%-8% target of the Bank of Zambia.
● The completion of the debt restructuring, which we estimate will catalyse foreign investments in Zambia, would enable the kwacha to appreciate in 2024 and 2025, helping to tame inflation. We estimate that CPl inflation will average 8% in 2025.
Improving Governance: Zambia is implementing IMF policy recommendations to improve governance and tackle corruption, for example, by revising public procurement legislation, and it has also enhanced public financial management and Bank of Zambia governance, supervision capacityy and independence.
Fitch Ratings
Fitch Ratings is a leading provider of credit ratings, commentary and research for global capital markets.
This report do rating action fc more detailed previously pu Commentary, www.fitchratir
Ratings Foreign Currer Long-Term IDR Short-Term IDR
Local Currency Long-Term IDR Short-Term IDR
Country Ceilin
Rating Deri
Component Sovereign Rating
Qualitative Overl Structural featu Macroeconomic Public finances External finance
Long-Term Forei Source: Fitch Rati
Data
GDP (USDbn) Population (m)
Source: Fitch Rating
Applicable C Country Ceiling C Sovereign Rating
Related Res Fitch Affirms Zam Upgrades LTLC ID (December 2023) Global Economic Interactive Sovere Fitch Fiscal Index Click here for mor Zambia
Analysts Thomas Garreau
+852 22639917
thomas.garreaua
Jose Mantero +44 20 3530 134 jose.mantero@fit
Rating Report
4 January 2024
