Zambia sovereign credit rating remains B+
Standard & Poor’s Ratings Services today affirmed its ‘B+/B’ foreign- and local-currency long- and short-term sovereign credit ratings on the Republic of Zambia. The outlook is stable. Our transfer and convertibility assessment for Zambia remains ‘B+’.
The ratings on Zambia are constrained by fairly low income levels ($1,500 GDP per capita), balance-of-payments vulnerability to swings in copper prices as copper accounts for about 80% of exports, and political risks. The ratings are supported by promising investment and economic growth trends, a fairly strong external balance sheet, and a low general government debt burden, which also benefited from debt relief and the effect on nominal GDP of double-digit inflation in 2007-2009.
We believe that although uncoordinated and sometimes contradictory views by cabinet members have increased uncertainty about future economic policies in Zambia, policy changes have so far been mostly measured and supportive of growth and modest debt burdens.
We forecast that the Zambian economy will perform well in 2012, with per capita GDP growth of just over 5%. The economy has been buoyed by an exceptional maize harvest in 2011, still-high copper prices, and strong investment in the mining sector. We project average annual inflation will decrease to about 6.0% in 2012 from 8.7% in 2011.
Despite high copper prices, we estimate that the current account surplus will slip below 2% of current account receipts (CARs) because of large imports needs. The general government deficit is expected to widen to 4.2% of GDP compared to 3.5% in 2011. We expect per capita GDP growth to remain close to 5.0% over the medium term, supported by high copper prices and generally prudent policies.
In our opinion, however, uncertainty about future economic policies has increased. Cabinet members have made several controversial statements and decisions–which have sometimes been quickly reversed–particularly about windfall tax, export tracking, and government participation in the mining sector.
We view positively the government’s objective to promote good governance and transparency. However, we are concerned that its reversals of some of the previous government’s privatizations on grounds of lack of transparency and flawed processes are perceived as partly politically motivated. In our view, this could have negative repercussions on investment and growth if investors think that the investment climate is deteriorating.
The dismissal of the central bank governor in September, when he had just six months left in his second term, and the recent ongoing debate about the status of the registration of the Movement for Multi-party Democracy (MMD) have also contributed to our impression of increased political interference.
However, we believe that most policy measures have been so far, broadly supportive of growth. The 2012 budget is expansionary, with a significant increase in capital expenditure, but we expect the deficit to narrow in 2013. The projections assume that slippages in current expenditure, in particular wages and subsidies, are limited.
We estimate Zambia has a net external liability position of 43% of CARs in 2012, which has improved since the current account has moved into surplus. Monetary policy flexibility is limited by moderately high dollarization.
The stable outlook reflects our view that changes to economic policies will be measured and supportive of growth and modest debt levels overall, despite uncertainties regarding the new administration’s economic policies.
We could lower the ratings if the new administration’s policies were to weaken external, fiscal, or monetary fundamentals, or impair copper production. We could also lower the ratings if Zambia’s external liquidity were to deteriorate significantly, for instance, as a result of an extended depression of copper prices.
The ratings could be raised if Zambia’s external liquidity were to become less vulnerable to copper prices and if investment in infrastructure were to keep per capita income growth rates at consistently high levels.