*Says it Fails to Address External Financing Risks
* Likely to miss deficit target
Zambia’s 2020 Budget could increase risks to the sovereign’s external debt sustainability unless new sources of grant funding or concessionary lending are found, Fitch Ratings says. The budget envisages a significant increase in such funding, but does not identify the likely sources.
Zambia’s recently-appointed Minister of Finance Bwalya Ng’andu delivered the 2020 Budget in a speech to parliament on 27 September. The budget seeks to narrow the fiscal deficit to 5.5% of GDP, but also sees an increase in expenditure, to 27.5% of GDP. Debt amortisation will add a further 4.9% of GDP to the government’s financing needs in 2020.
The budget forecasts a revenue increase to 22% of GDP, driven by expected increases in mining revenue, adjustments to VAT and higher government fees and fines. Zambia’s revenue averaged 19% of GDP in the five years to 2018. In 2018, revenue outperformed the budget target when copper production exceeded expectations.
Fitch expects a slight increase in revenue, but we think the 2020 deficit target will probably be missed. Fitch’s current deficit forecast assumes that expenditure falls slightly, to 26% of GDP in 2019 and remains broadly the same in 2020, resulting in a cash deficit of 6.7% of GDP. The higher spending contained in the 2020 Budget will likely lead us to make an upward adjustment to our 2020 fiscal deficit forecast, but Fitch believes that finding new sources of external financing will be difficult and that the lack of new financing sources will constrain spending.
New external borrowing is forecast to exceed estimated external amortisation in 2020, which would keep Zambia’s government debt on an increasing trajectory. The budget envisages ZMW30.6 billion in foreign financing and grants, equivalent to nearly 9% of GDP, whereas historically grants have provided no more than 1%-2% of GDP in financing.
In the absence of significant new sources of grant funding or concessionary lending, this would increase the risks to Zambia’s external position from already high debt servicing costs. The 2020 budget envisages total public external debt servicing costs of about USD1.5 billion, up from USD800 million in 2018 and an estimated USD1.1 billion in 2019.
Fitch downgraded Zambia’s sovereign rating to ‘CCC’ in June in view of the high external financing requirements, the continued fall in foreign exchange reserves, constrained access to financing and a further rise in government debt. The country has increased its stock of external debt and increased the percentage of commercial and non-concessionary public borrowing to fund an ambitious program of infrastructure development. The level of capital expenditure increased to an average of 5.9% of GDP in the years 2014 to 2019 compared to 3.9% in the previous five years.
Zambia has been in discussions with the IMF on a programme that would likely provide additional external financing, but has yet to reach staff level agreement. An IMF agreement would offer a stronger signal of Zambia’s commitment to fiscal adjustment. It would also mitigate external debt servicing risks as Zambia approaches repayments of a USD750 million Eurobond in 2022 and another USD1.25 billion bond due in 2024.