The international rating agency Moody’s has downgraded the rating for Zambia as an issuer from B2 to B3. The agency has also changed Zambia’s economic future outlook from stable to negative.
What are the implications of these changes?
Firstly, this means that global financial institutions will be skeptical about Zambia. The higher perceived risk means the interest rates of lending to Zambia will be increased, thereby making our external debt more expensive to service through higher charges. Bear in mind that our Ministry of Finance already needs to pay around US$21 million each month on the interest alone for the three Eurobonds contracted under the PF Government.
Secondly, the current holders of Kwacha denominated instruments will get rid of them. This will mean the weakening of the Kwacha. So the little gains made by the Kwacha over the last fortnight will be eroded.
Thirdly, in a bid to stem this, the Central Bank (BOZ) will have to increase or maintain our already high interest rates. This means that access to credit by local businesses, especially our Small and Medium-sized Enterprises (SMEs), will remain difficult, holding our economy and job creation prospects back. Banks will likely increase their interest rates further or cut borrowing altogether in the context of the uncertainty around further spending by Government, especially during the upcoming election campaign period.
In its statement, Moody’s has attributed this fall in the rating in large part due to problems with fiscal policies, especially Government maintaining high levels of expenditure despite reduced income. This strain on the budget has been made all the greater due to the failure of Government to put in place policies that can generate more income to the state.
Yields on Zambia’s US$1.25 billion Eurobond sold in July have climbed to 11.4 percent from about 9.4 percent at the beginning of August 2015. This is a result of increased pressure on yields meaning that investor expectations of profits are high because the risk is high. A similar situation can be observed on the Kwacha that has depreciated by 41 percent against the dollar this year, more than any of the 150 currencies tracked by Bloomberg.
The reaction from the Government and the Ministry of Finance is a laissez faire approach, meaning that they want to treat this as business as usual. The PF is seeking to hoodwink the people into thinking that things are normal and that the Government is in firm control of the country’s finances, while it increases expenditure in the run up to elections. This is a betrayal of our local entrepreneurs and SMEs, of hard working citizens, those looking for jobs, and our children who will be the ones paying back these escalating debts for years to come. The time has come for a Government ready to face up to economic realities and take action to protect our future.
The authrot, Geoffrey Bwalya Mwamba is UPND Vice President for Administration