Global Credit Research - 09 Dec 2014
London, 09 December 2014 -- Strong economic growth and robust government fiscal strength continue to support Zambia's (B1 stable) credit profile, says Moody's Investors Service in its annual Credit Analysis report, published today. However, the rating agency notes that the small size and relatively undiversified nature of Zambia's economy mean that it is vulnerable to adverse conditions in the agriculture sector and volatility in global copper prices.
The rating agency's report is an update to the markets and does not constitute a rating action.
"Zambia's economy continues to register robust growth rates, averaging 7.8% per annum in real terms since 2005. We expect that economic growth will remain at around the same level in the coming years, supported by the development of infrastructure projects. The government's fiscal position is also strong, though deficits have increased and high dependence on a single export commodity, copper, leaves Zambia exposed to adverse price movements," says Matt Robinson, senior credit officer at Moody's.
With nominal GDP estimated at $26.3 billion in 2014, Zambia's economy is on par with the Sub-Saharan Africa median, but ranks below the median for B1-rated sovereigns globally, according to Moody's. Zambia's GDP was rebased to 2010 prices in February 2014, and preliminary estimates suggest that the economy is now 25% larger than previously thought.
Although high poverty levels, income inequality and limited economic diversification -- with agriculture, forestry and fishing accounting for more than 70% of employment -- continue to constrain Zambia's credit quality, ongoing government efforts look to address the country's infrastructure deficiencies. These include projects to develop connectivity, raise power output, and to improve productivity in the agriculture sector.
As a result, Moody's expects that Zambia's real economic growth will likely remain strong, rising above 7% in 2015, slightly higher than the government's estimate for 2014 of more than 6.5%.
Copper production and related sectors contribute 25-30% to the country's GDP and generate the majority of current account receipts. This leaves it exposed to adverse copper price movements and a slowdown in Chinese growth, as China accounts for the majority of copper exports, says Moody's. In addition, facing growing pressure from the population for a greater share of mining sector wealth, the government's approach and recent policy actions, such as a change in the mining tax regime, run the risk of deterring foreign investment.
Nonetheless, Zambia's fiscal strength remains fairly high, supported by a balance sheet carrying a moderate level of public sector debt at around 32% of GDP. An expansionary fiscal policy since 2011 has put Zambia's debt on a strong upward path, with a 6.7% of GDP deficit in 2013 sharply contrasting with the deficits of below 2% on average for most of the decade up to 2011, though the government has committed to slowing expenditure growth and the rise in the public debt burden.
According to Moody's, so far, the government's commitment to fiscal consolidation is holding. The fiscal performance through the first half of 2014 was roughly on par with budget, though the original deficit target of 5.2% of GDP has since been relaxed to 5.5% in the 2015 Budget delivered in October. But pressure on the fiscal position will continue amid growing demand for higher public sector wages and development expenditure, particularly in the areas of education, health and infrastructure. Beyond the immediate presidential by-election in January 2015, these pressures will undoubtedly be amplified in the lead up to national elections in 2016, says Moody's.
The rating agency also notes that Zambia's increasingly noisy political scene, which despite relative stability over the past five decades, presents rising risk to policy predictability, the investment climate, and FDI.
Matthew Allan Robinson
VP - Sr Credit Officer/Manager
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA