Zambia Mine Revenue May Help Narrow Budget Gap, Moody’s Says

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Zambia may keep its budget deficit below 6 percent this year because of increased revenue resulting from changes to the country’s mine-tax system, according to Moody’s Investors Service.

The International Monetary Fund last week forecast the fiscal gap in Africa’s second-biggest copper producer will climb to 7.7 percent of gross domestic product this year. That’s higher than the government’s projection of at least 6 percent, which it raised from 4.6 percent after an increase of mining royalties and scrapping of a profit tax in January disrupted revenue flows from the industry. The changes to those levies will be reversed from the start of next month.

“We don’t expect the deficit for the second half to be anywhere near as large, in fact it could be a surplus for that six-month period, ultimately resulting in a fiscal deficit somewhere in the vicinity of 5 to 6 percent of GDP,” Matt Robinson, credit manager at Moody’s, said in an interview Tuesday in the Kenyan capital, Nairobi.

The southern African nation plans on setting the royalty for underground miners at 6 percent, scrapping an earlier plan to charge the same 9 percent rate set for open-cast mines. A 30 percent profit tax will also be reintroduced for both types of operations. The current tax system that came into effect in January charges a 20 percent royalty for open-pit mines and 8 percent for underground operations.

“The mining tax regime revision means lots of the revenue may accrue in the second half of the year, rather than the first half,” Robinson said.

Copper Output

Zambia’s copper production may stay close to a three-year low of 708,258 metric tons in 2015, because of power shortages and uncertainties caused by changes to the tax regime, according to the Mines Ministry. The Finance Ministry plans to cut spending by at least 5 billion kwacha ($678 million) this year, and said it will probably sell Eurobonds to raise as much as $2 billion to boost the budget.

The negative outlook that Moody’s assigned to Zambia’s B1 rating last month captures the “likelihood for a further fiscal deterioration,” Robinson said. Moody’s could reposition Zambia’s rating lower to the B2 level, if the deterioration, partly the foreign-currency risk caused by selling more foreign currency debt, continues for the next year, he said.

Credit Quality

“What has underpinned credit quality for a long time in Zambia is relatively low debt, but we are seeing that debt burden increase,” Robinson said. “It’s been a current account surplus, but we have now seen that translate into a current account deficit with a decline in copper production and decline in copper prices.”

Copper accounts for more than 70 percent of Zambia’s export earnings and 12 percent of government revenue. Yields on Zambia’s $1 billion of dollar notes maturing in April 2024 have risen 107 basis points so far this year to 8.09 percent on Wednesday, while the kwacha has weakened 15 percent over the period. The kwacha strengthened 0.3 percent to 7.34 per dollar by 7:30 a.m. in Lusaka on Thursday.

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