Credit rating agency, Moody’s has downgraded Zambia’s credit rating with a negative outlook from stable.
Moody’s cited external and liquidity pressures impairing government’s ability to service debt over medium-term as reasons for changing the long-term issuer ratings outlook which was stable at Caa1 to Caa2.
The downgrade follows three downgrades in 2018.
The rising probability of default also reflects increasingly stark credit challenges stemming from rising debt levels, which further reduce the likelihood that the external and liquidity stress will be resolved rapidly.
Moody’s says the Caa2 rating balances those pressures against the possibility that Zambia could refinance forthcoming maturities and continue to service its debt while preventing a depletion of foreign exchange reserves.
It now projects Zambia’s government debt burden (including arrears) to exceed 76% of GDP in 2019, significantly higher than earlier expected, and to increase further approaching 80% early in the next decade.
The negative outlook reflects the risk of material losses to investors in the event of a default by Zambia, beyond what would be consistent with a Caa2 rating.
Despite mineral royalty receipts being remitted in US dollars, the country’s foreign exchange reserves have continued to decline gradually in recent months.
As of the end of April, foreign exchange reserves had fallen to about US$1.1 billion, or 1.3 months of imports, well below the three-month of imports threshold commonly considered a minimum level of reserve adequacy.
Current reserve holdings have reached a record-low level in almost a decade and are very low compared to the external debt payments due in the remainder of 2019 and in 2020.
