Moody’s Upgrades Zambia Ratings with Stable Outlook
Moody’s Ratings has upgraded the long-term foreign-currency issuer rating of the Government of Zambia to Caa2 from Ca, the long-term local-currency issuer rating to Caa2 from Caa3, and maintained a stable outlook.
It also assigned a Caa2 foreign-currency senior unsecured debt rating to the new bond exchanged for the previously outstanding unrated bonds.
Recall that the government announced the completion of the mandatory exchange of existing Eurobonds, for which it had been in default since 2020, for new instruments on June 12.
Moody’s said the issuer ratings upgrade reflects an incremental improvement in the still very weak credit profile post-bond restructuring, which achieved some financial relief by easing government liquidity pressures, improving debt affordability and slightly reducing the debt burden.
The rating note stated that the country’s Caa2 ratings indicate a still-elevated risk of re-default over the next few years given that government debt remains very high, debt affordability remains strained and access to funding remains constrained.
It noted that economic challenges related to the reliance on a single export commodity (copper) persist, as do very high environmental and social risks and ongoing governance challenges.
However, it added that the stable outlook balances risks at the Caa2 rating level, reflecting anticipated access to concessional financing from international financial institutions that eases liquidity pressures and supports debt sustainability, notwithstanding slowing growth and rising financing requirements in the near term.
The government’s strong performance to-date under its IMF programme anchors Moody’s expectation of continuing gradual institutional improvement, according to the rating note.
Analysts said availability of IMF funding mitigates near-term liquidity risks related to the latest drought. The local and foreign-currency ceilings are raised by one notch to B2 and B3 from B3 and Caa1, respectively.
The local-currency ceiling three notches above the sovereign rating reflects the government’s small role in the economy and moderate domestic and geopolitical risk relative to peers.
The rating noted the improved trajectory for institutional strength, notwithstanding relatively high external imbalances and heavy reliance on a single common revenue source in copper for both the government and private sector issuers.
The one-notch gap between the foreign-currency ceiling and the local-currency ceiling reflects Zambia’s open capital account and track record of limited intervention on foreign-currency transactions since the 2020 default, notwithstanding high external indebtedness and very low policy effectiveness.
Moody’s said Zambia bond exchange alleviates the Government immediate liquidity pressures by extending maturity payments and reducing the coupon payments compared to the original obligations.
Bondholders also accepted a 22% reduction in total outstanding claims – inclusive of outstanding bonds’ face values and past due interest payments.
Under the new terms, the government will pay $386 million in 2024 and 5.75% in coupons until June 2031 to holders of Bond A, its new bond and 0.5% in coupons to holders of Bond B.
This compares to coupons of up to 8.97% on the previously outstanding bonds, representing a degree of financial relief, Moody’s stated.
Nevertheless, analysts noted that the servicing and annual maturity payments of Bond A will remain challenging given the government’s constrained access to financing, especially in foreign currency.
Higher interest payments and accelerated maturity payments of Bond B in the “upside scenario” as early as 2026 will add to these challenges unless the higher and earlier payments are commensurate with an improvement in Zambia’s debt carrying capacity and accompanied by improved access to foreign currency financing.
Overall, Moody’s estimates that the government’s borrowing needs to cover debt payments and fiscal deficits at around 20%-25% of GDP in 2024 and 2025. Incremental financial support from international donors and lenders will be necessary to close the financing gap.
It said the impact of the Eurobond restructuring on government debt ratios is limited. The $840 million haircut on total bondholder outstanding claims equates to around 3% of GDP.
Moody’s estimates that general government debt-to-GDP will decline only slightly in 2024 to 110% and will remain elevated, representing a significant constraint on creditworthiness and the ratings over the medium term.
Analysts added that debt affordability will remain strained, with interest payments of 30% of government revenues in 2024 and 2025.
The government also faces new spending pressures, especially in relation to the devastating impact of the ongoing drought that is weighing on GDP growth and increasing social risks related to food insecurity and loss of income and employment.
Meanwhile, economic challenges stemming from Zambia’s reliance on a copper will continue. Copper accounts for approximately 70% of Zambia’s exports.
While global demand for copper is supported by the transition to green technologies, such a concentration of export revenues makes Zambia’s credit profile susceptible to the fluctuations of global commodity markets.
Additionally, Zambia’s energy supply and copper production have been historically impacted by periodic climate shocks such as flooding and droughts.
Moreover, Moody’s said it anticipates that structural social risks, including low incomes and poverty, along with governance issues due to persistently weak institutions, will remain significant concerns.
The government continues to negotiate with other commercial creditors regarding outstanding debts that continue to be in default.
Moody’s anticipates they will be restructured on comparable terms to those offered by official creditors and Eurobond holders, be it in the form of interest reductions, maturity extensions or a reduction in outstanding claims.
The government is obliged to pursue comparable relief from all creditors as part of debt treatment under Common Framework and the Eurobond restructuring agreement includes a clause that requires the government to ensure certain other creditors do not receive more favourable terms.
The stable outlook balances the debt and liquidity relief achieved through the bond restructuring and support from development institutions and the donor community against continued high financing requirements of the government amid increased social spending pressures and slowing growth that risk generating liquidity challenges in the near term.
Moody’s said Zambia’s strong performance under its IMF Extended Credit Facility should allow it to continue accessing concessional financing from international financial institutions and underpin governance reform efforts.
This continuing support will be critical in mitigating the credit impacts of the current climate shock and accessing sufficient financing to avoid redefault.
Moody’s anticipates government access to liquidity beyond concessional sources will remain strained and recent incremental governance improvements will take time to support growth, fiscal sustainability and a reopening of access to international capital markets.
Zambia’s large natural resource endowment in copper and other critical minerals positions it well to benefit from the global energy transition.
The government has been successful in attracting new investment into the sector, and Moody’s expects this investment to support robust GDP growth over the medium term.
However, issues with energy generation will weigh on mining production and risk limiting the benefits to government revenues, exports and growth absent improved energy reliability for the sector and for the economy more broadly. #Moody’s Upgrades Zambia Ratings with Stable Outlook
