Fitch Affirms Zambia at ‘Restricted Default’
Fitch Ratings has affirmed Zambia’s Long-Term Foreign Currency (LTFC) Issuer Default Rating (IDR) at ‘Restricted Default’ (RD). The affirmation reflects that Zambia remains in default on its non-bond foreign-currency commercial debt, pending a restructuring, the rating note said.
Since the June 2024 Eurobond exchange, Zambia has reached agreements in principle (AIP) with four creditors, Fitch said. “Two of these had claims that were Sinosure-insured that we do not consider commercial.”.
With the agreement in principle with the two other creditors, 27% of Zambia’s external commercial debt remains non-performing in 2021 and has not been restructured or reached an agreement in principle yet, down from 28% in June.
In the rating note, Fitch analysts expect Zambia will complete its external debt restructuring under the Common Framework in the first half of 2025.
“We estimate Zambia’s public debt will fall from 126% in 2023 (including past due interest) to 117% in 2024 and 100% in 2025, driven by the haircut on the Eurobonds, our assumption of a similar haircut on the claims still to be restructured, primary surpluses and robust nominal GDP growth.
“The haircut on the Eurobonds represented 3% of estimated 2024 GDP. The newly-issued Eurobonds on completion of the Eurobond exchange contain a most favoured creditor clause, which restricts Zambia from restructuring debt with its remaining creditors on more favourable terms without offering consideration of equivalent value to noteholders”, Fitch said.
Zambia GDP growth forecast for 2024 has also been revised down to 1.2%. Fitch had lowered the country’s growth forecast in June to 2% from 4%.
Growth downgrade reflects the impact of El Nino on agricultural output and electricity generation, with hydroelectricity representing more than 80% of Zambia’s energy mix, according to the rating note.
Analysts noted that contraction in Zambia’s agriculture sector reached 21% year on year in the first half of 2024, and power shortages affected large sectors of the economy, including manufacturing.
However, the mining sector has been partially preserved from these shortages, with the government prioritising energy distribution to this sector.
“We project 5.5% real GDP growth in 2025 and 5% in 2026, with El Nino coming to an end. Growth will still be constrained by some power shortages, although of a much less severe intensity than in 2024, with some dams taking up to three years to fully recover”.
Fitch views that the recent acquisition of two major copper mines, Mopani and KCM, by private companies, and strong investment in exploration and commissioning of new mines for copper, cobalt and nickel production will drive GDP growth in 2025 and 2026.
Copper production has reached an historical low of 699 thousand metric tons in 2023, down from 869 thousand metric tons in 2020, according to the rating note.
However, production increased by 2% in 8-month 2024 compared with 8-month 2023 and analysts anticipate a significant increase in output in the coming years.
The fiscal response to El Nino contributed to a temporary pause in fiscal consolidation. Analysts anticipate the primary balance to be slightly in surplus, at 0.1% of GDP in 2024, down from 0.6% in 2023 but much stronger than the revised IMF target of a 0.7% deficit.
In 1H-2024, the primary surplus reached 3.4% of GDP but Fitch analysts expect the planned clearance of fuel arrears by year-end, to weigh on expenditure in 2H-2024. However, most of the drought response plan has been financed by savings elsewhere.
“We forecast the primary balance to improve to a surplus of 1.4% of GDP in 2025 and 1.6% in 2026, driven by a combination of increasing revenue collection and a continued moderation in current expenditure, including the wage bill”.
Zambia’s inflation remained high. Scarcity of some food products, increases in electricity tariffs and currency depreciation contribute to still elevated inflation, which we anticipate will average 15% in 2024, up from 10.9% in 2023.
Fitch analysts expect it to moderate to 13% in 2025 and 9% in 2026, partly on a more stable currency and improving food supply as exchange rate volatility declined.
In May 2024, Bank of Zambia implemented a new FX regime, with all transactions up to USD1 million being settled at an exchange rate it defines, revised three times per day.
Combined with the 5% ceiling on non-resident participation in local-currency auctions, which aims to avoid abrupt entrances and exits of non-residents from the primary local-currency market, analysts expect this will lower exchange-rate volatility.
To reduce dollarisation of the economy and enhance its monetary policy channels, the central bank is also considering imposing the kwacha for all transactions between residents.
The affirmation of the Long-Term Local-Currency IDR at ‘CCC+’ reflects the substantial credit risk, including elevated liquidity risk, partly due to an interest/revenue ratio of 29% in 2025 and 27% in 2026, well above the ‘B’/’C’/’D’ median of 16% and 15%, respectively.
“We anticipate the share of local-currency debt in total debt will increase to 47% in 2026, from 40% in 2024”.
Zambia has benefited from comfortable bid-to-cover ratios in 2H-2024, following a more stressed 1H-2024, which was partly due to a significant rise in compulsory reserve requirements. Fitch analysts said they expect this to continue as domestic banks are well capitalised and profitable.
To accelerate the re-fixing of local-currency securities in a context of an expected decline in interest rates, the authorities target a 68% proportion of short-dated instrument in total domestic new issuances in 2025-2026.
The expected rebound in metal exports combined with subdued imports underpin Fitch’s forecast for the current account to shift to a surplus of 1.1% of GDP in 2024, from a 2.1% deficit in 2023.
“We expect the current account balance will improve in 2025 and 2026, to 1.8% and 2.7% of GDP, respectively, on sustained higher metal exports and despite our expectation of a copper price decline”, Fitch stated.
Combined with still strong disbursements from international financing institutions, the rating agency said this will contribute to an increase in international reserves to 4.7 months of current external payments in 2026, from 4.1 months in 2024.
“We have affirmed the rating on the two US dollar-denominated bonds issued on settlement of June 2024 Eurobond exchange at ‘CCC+’.
“This reflects our assessment of Zambia’s expected credit profile after completion of the whole debt restructuring, with a still elevated debt level, high interest/revenue ratio, and elevated external liquidity risks,” Fitch said. FBN Holdings Sheds 8% as Investors Exit Positions
