Moody’s Cuts Zambia Deeper Into Junk on Higher Default Risk

LUSAKA (Capital Markets in Africa) – Moody’s Investors Service has cut its assessment of Zambia’s debt deep into junk territory citing a rising probability of default.

Moody’s downgraded the southern African nation’s long-term foreign-debt rating to Caa2 — the fourth-lowest junk assessment — from Caa1 and reduced the outlook to negative, it said in an emailed statement Thursday. The higher risk of a default “reflects increasing credit challenges stemming from rising debt levels,” exacerbated by weakening growth, which reduce the country’s chances of resolving its liquidity stress quickly, it said.

Zambia’s kwacha is the world’s sixth-worst performing currency against the dollar this year, Bloomberg data show. This week, the central bank raised its key interest rate for the first time since 2015. The nation is struggling to shore up its finances after the government threatened to nationalize foreign-owned copper mines. The country is Africa’s second-biggest producer of the metal.

The kwacha has depreciated as much as 39% since early 2017, raising the country’s debt burden. Moody’s now sees Zambia’s debt topping 76% of gross domestic product in 2019, before reaching 80% early in the next decade.

“In the absence of credible policies to rebuild a foreign-exchange reserves buffer, Zambia will remain exposed to bouts of depreciating pressure, which would negatively affect the debt dynamics, given the significant proportion of debt denominated in foreign currency, at about 60% of the total,” Moody’s said.

The country’s reserves will continue to decline in the absence of financial support from the International Monetary Fund or of debt reprofiling with some creditors including China, it said. The ratings company expected debt to stabilize at $1.7 billion at the time of its last ratings action in July.

The current rating “balances those pressures against the possibility that Zambia could refinance the forthcoming maturities and continue to service its debt while preventing a depletion of foreign-exchange reserves,” Moody’s said.

Soucrce: Bloomberg Business News