Zambia Credit Rating Cut by S&P as Budget Deficit Worsens

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Standard & Poor’s cut Zambia’s credit rating deeper into junk as it forecast the government will post a budget deficit far worse than previously estimated, adding to its debt burden.

The rating was lowered to B, five levels below investment grade, from B+, with the outlook changed to stable from negative, S&P said in a statement. S&P kept the rating unchanged about three months ago. The currency weakened to head for its lowest closing price since April 6, while bonds fell, pushing the yield on Zambian debt due April 2024 to an all-time high.

Sliding copper prices have hurt Africa’s second-biggest producer of the metal, curbing economic growth and fueling a 15 percent plunge in the value of the kwacha against the dollar this year. S&P estimates the budget deficit, on a cash basis, may reach 10 percent of gross domestic product this year, higher than the government’s projection of at least 6 percent and the 7.7 percent shortfall forecast by the International Monetary Fund.

“Zambia’s fiscal position is markedly and negatively deviating from our previous expectations,” S&P said. “Financing this deficit will lead to increased external indebtedness and higher related interest costs.”

Including debt payments, the budget deficit is forecast by S&P to reach 14 percent of GDP. The government may struggle to keep spending under control ahead of elections in 2016, it said.

The kwacha fell 0.4 percent against the dollar to 7.54 as of 10:20 a.m. on Thursday in the capital, Lusaka. Yields on Zambia’s $1 billion of 2024 notes rose a fifth day, climbing one basis point to 8.43 percent, a record high and compared with 7.12 percent at the end of 2014.

Eurobond Sale

The budget is coming under strain after President Edgar Lungu, who took office in January following the death of his predecessor Michael Sata, agreed to scale back plans to increase taxes on mining companies. Government revenue from mining may be as much as 50 percent lower than budgeted because of sliding output and uncertainty about the tariffs, S&P said.

The government has signaled it may sell as much as $2 billion of Eurobonds as it seeks to finance the deficit. That will boost Zambia’s net debt burden to about 50 percent of GDP, S&P said.

A weakening currency may also add to the nation’s debt burden. Fitch Ratings warned on June 29 that interest payments on debt may surge to 17 percent of government revenue this year, up from 8 percent in 2012. Fitch rates Zambian debt at B, the same as S&P. Moody’s Investors Service has a rating one level higher at B1.

“The vulnerability of the kwacha is a major issue on this front, as a greater external debt load will mean currency risks become much more acute,” Gareth Brickman, an analyst at ETM Analytics in Johannesburg, said in a note to clients.