Fitch Downgrades Zambia to 'B'; Stable Outlook

Mon Oct 28, 2013 1:28pm EDT

Link to Fitch Ratings' Report: Zambia - Rating Action ReportLONDON, October 28 (Fitch) Fitch Ratings has downgraded Zambia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'. Its foreign currency senior unsecured bond ratings have also been downgraded to 'B' from 'B+'. The Outlook is Stable. Simultaneously, the Short-term IDR has been affirmed at 'B' and the Country Ceiling downgraded to 'B+' from 'BB-'. KEY RATING DRIVERS The downgrade of Zambia's Long-term IDRs reflects the following key rating drivers and their relative weights:- High: -Government finances have deteriorated sharply. The authorities expect a deficit of 8.5% of GDP in 2013, against an expected deficit at the time of the budget of 4.5% and an average of 2%-3% between 2006 and 2011. The overshoot largely reflects overspending on subsidies, a risk Fitch has highlighted in the past, which will total 4% of GDP, against 0.7% in the budget. This reflects perennial under-budgeting for subsidies, delays in scrapping the fuel subsidy as well as arrears payments and taking on contingent liabilities of the Food Reserve Agency. Lower-than-expected revenue also contributed towards the deterioration. In contrast, Fitch expects further spending over-runs and revenue shortfalls and predicts a deficit of 9% of GDP for 2013. -A 38% increase in public sector wages will contribute to the deficit remaining elevated at 6.6% of GDP in 2014, based on budget figures announced in October 2013. Fitch forecasts that spending will over-run again in 2014, reflecting the cost of the wage increase and higher debt service costs. -Fitch expects that wider deficits will place upward pressure on key debt ratios, and forecasts that gross general government debt (GGGD) will rise to 36.3% of GDP by end-2013, from 25.5% in 2011. A slow pace of fiscal consolidation is expected to push GGGD to 40% of GDP by 2015, above the current 'B' median of 38.1%. Medium: -Zambia's external position has weakened, despite robust foreign direct investment of 5.5% of GDP and running only a modest current account deficit of an estimated 2% in 2013. However, Fitch forecasts a deficit on the balance of payments, due to continued large outflows from the domestic private sector. This will put further pressure on reserves which are forecast to end the year at 2.3 months of import cover, adding to Zambia's external vulnerability. -Continued uncertainty regarding microeconomic policies that could deter investment and adversely affect medium-term growth prospects and macroeconomic stability. Zambia's 'B' IDRs also reflect the following key rating drivers:- -Growth is forecast by Fitch to average 7% in the medium term supported by an ambitious infrastructure programme, rising copper production and continued foreign investment. -A decade of growth above 6% has resulted in an improvement in social indicators, but per capita income (at 60% of the 'B' median) and measures of human development still compare weakly. Health and education outcomes are especially poor, with average life expectancy of 49 years. The lack of skills adversely affects the employability of the workforce with only 10% employed in the formal sector. The average adult has less than seven years of schooling. RATING SENSITIVITIES The Stable Outlook means Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could, individually or collectively, result in a positive rating action include: -A faster-than-expected and sustained fiscal consolidation that reduces the debt burden over the medium term -A significant improvement in international reserves to reduce Zambia's vulnerability to external shocks -Greater certainty that the business environment will remain consistent with attracting investment and supporting robust medium-term growth Conversely, the main factors that individually, or collectively, could result in a negative rating action include: -A further deterioration in public and external finances that puts debt on an unsustainable path and jeopardises Zambia's external financing capacity -An extended period of below trend growth that erodes debt sustainability -A sustained and severe deterioration in the copper price KEY ASSUMPTIONS Fitch assumes that GDP growth will remain robust averaging 7%, based on the assumption that copper production will increase to 1.6MT by 2017 from 0.8MT currently, in line with the government's projections. Fitch assumes that some fiscal consolidation will take place, albeit at a slower pace than the authorities' projections. Favourable growth forecasts and a sustainable external position assume no sustained steep fall in commodity prices. Contact: Primary Analyst Carmen Altenkirch Director +44 20 3530 1511 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst KitLingYeung Analyst +44 20 3530 1527 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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