International credit rating agency doubts PF capacity, says will take 5 rainy seasons to repair Zambia

MOODY’S has doubted the PF government’s capacity to deliver on necessary national budget measures to be announced today in view of continued shortage of revenues. 

And Moody’s Investors Service says Zambia will this year record its lowest economic growth rate since 2002.

Meanwhile, the international credit rating agency says it will take five years of consistent rainy seasons to restore Zambia’s hydropower generation to its full capacity after Zesco overused water from its key reservoirs at Lake Kariba and Itezhi-tezhi dam.

On September 25, Moody’s downgraded Zambia’s credit rating to B2 from B1, citing expectations of a sustained deterioration in fiscal and debt metrics for the next five years, and the expected continued weak copper prices and lack of electricity to support growth.

In reaction, the Ministry of Finance urged investors to ignore Moody’s downgrade as an “unsolicited” credit rating.

“We appeal to Moody’s to restrain themselves from imposing assessments on Zambia because the act is inconsistent with international best practice,”  ministry public relations officer Chileshe Kandeta stated. 

However, on October 2,  finance minister Alexander Chikwanda told Parliament that: “It is a pity that an overzealous officer (Kandeta) commented on Moody’s to our embarrassment as a ministry.”

According to Moody’s detailed analysis of its recent downgrade of Zambia’s credit rating, the country was expected to continue experiencing persistent fiscal deficits and deterioration in debt metrics witnessed over the past few years.

Moody’s stated that the PF government’s trend of missing fiscal targets would continue

in next year’s budget.  

“We expect fiscal deficits to remain elevated in the five per cent to seven per cent range for the next several years amid lower growth, subdued mining sector revenues, expenditure pressures, and higher debt-servicing costs following significant currency depreciation. The challenging domestic and external environment combined with the trend of missed fiscal targets in recent years suggests government will find it difficult to deliver on necessary revenue generation or expenditure restraint required to meet fiscal consolidation targets likely to be announced in the 2016 budget,” Moody’s stated. 

“Upward rating pressure is unlikely in the current context. However, several conditions could provide for a positive outlook and, eventually, an upgrade, including demonstrated fiscal consolidation that significantly reduces the budget deficit, leading to a meaningful reversal in the debt burden; a reduction of the current account deficit towards balance and an eventual return to surplus, or sizable strengthening of foreign exchange reserves, or both, that reduce external vulnerability; or material improvement in the growth outlook that paves the way for stronger government revenues and foreign exchange earnings.”

And Moody’s stated that subdued growth outlook was expected to compound Zambia’s fiscal challenges.

“The subdued growth outlook will exacerbate the government’s fiscal consolidation challenge,” it stated. “We expect GDP growth in 2015 to fall below five per cent for the first time since 2002, in stark contrast to the country’s average growth rate of seven per cent over the past decade.” 

Meanwhile, Moody’s stated that this year’s drought that had led to lower water levels at

the country’s three main hydropower plants, resulting in a total deficit of 985 megawatts, would continue to impact the economy negatively.

“Despite power imports from neighbouring Mozambique, we expect the acute drought-induced gap between supply and demand will last until the next rainy season,” stated Moody’s.

“Moreover, it could take another five years before dam levels return to levels consistent with full generation capacity, meaning the electricity crisis could persist for a protracted period, with concomitant downside risk to growth expectations.”

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