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Zambia's Plea to Ignore Moody's Snubbed as Kwacha, Bonds Slump

Updated on
  • Currency plunges to record low after credit downgrade
  • Moody's action a `wake-up call' for government, RMB says

Zambia’s finance ministry urged investors to ignore an “unsolicited” credit downgrade by Moody’s Investors Service. Instead, they’re disregarding the plea.

The kwacha, the world’s worst-performing currency this year, extended its slump to the weakest level since Bloomberg started compiling the data in 1994, while yields on the nation’s Eurobonds soared to record highs. The debt has lost 8.6 percent this month, the most after Brazil’s out of more than 30 developing nations monitored by Bloomberg indexes.

Moody’s cut its rating for Africa’s second-biggest copper producer Sept. 25 by one step to B2, five levels below investment grade. Plunging prices for copper, which Zambia depends on for 70 percent of export earnings, and an electricity shortage will curb economic growth, the company said. The government said it didn’t provide input before the debt assessment and investors should ignore the decision as it was “against best practice.”

“You can’t ignore what ratings agencies are saying,” Ronak Gopaldas, a Johannesburg-based credit-risk analyst at Rand Merchant Bank, said by phone. “Your economy is facing a perfect storm and those headwinds are being reflected in the credit rating, in terms of both fundamentals and sentiment.”

Yields on Zambia’s $1.25 billion of Eurobonds due July 2027 climbed 29 basis points to 12.12 percent by 12:55 p.m. in London, adding to Monday’s 42-point rise. The yield has soared 275 basis points since the debt was sold in July. The kwacha weakened 3.4 percent to 12.4023 per dollar after plunging 9.8 percent on Tuesday. The Zambian unit is down 39 percent this quarter, the most out of more than 150 currencies tracked by Bloomberg.

Rejecting the Moody’s downgrade in a statement on Sunday, Zambia’s finance ministry said it only has “rating relationships” with Fitch Ratings Ltd. and Standard & Poor’s, which affirmed the country’s standing on Sept. 25 and kept the outlook as stable. The Moody’s cut puts Zambia’s rating at the same level as the other two companies.

“We appeal to Moody’s to restrain themselves from imposing assessments on Zambia because the act is inconsistent with international best practice,” the ministry said. “The assessment made by Moody’s that Zambia’s credit rating had deteriorated should be ignored because its correctness was not discussed with any authorized representative of the Zambian government.”

Moody’s only assigns an unsolicited sovereign rating “when confident that we have sufficient info and after careful consideration of the usefulness of the rating to the capital market,” Peter Griffiths, a London-based spokesman for the company, said by phone. Sovereign ratings also provide an analytical benchmark for debt issuers in a country such as banks, he said.

Power Shortage

The southern African nation is grappling with its worst-ever power shortage and metal prices that have fallen to six-year lows, prompting companies including Glencore Plc to halt operations. Glencore’s decision to suspend output at an operation that produced about a quarter of the country’s copper last year has threatened growth, which the government forecasts would reach 5 percent this year, Moody’s said in a separate report this month. Copper has dropped 27 percent in the past year.

“Governments don’t like being downgraded, so you can see why the government might try to defend itself,” Stuart Culverhouse, London-based chief economist at Exotix Partners LLP, said in reply to e-mailed questions. “If the government spent more time on drawing up a credible policy response and clearly communicating that with the market, it might not be in this position.”

Zambia’s budget deficit is set to grow to 8.4 percent of gross domestic product this year, nearly double the government’s initial target of 4.6 percent, according to Barclays Plc. Economic expansion will slow to 3.4 percent in 2015, the worst performance in 17 years, Barclays said last week.

Investors are looking for assurances that Zambia’s government will continue to curb spending as tax revenue slows, Gopaldas said.

“The government should treat it as a wake-up call and address some of the key issues instead of ignoring it,” he said. “Investors are looking for a firm commitment to fiscal consolidation, particularly heading into an election year and in the face of external pressures.”

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