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Zambia risks Fitch downgrade over fiscal indiscipline

 

FITCH Ratings has observed that Zambia could see a rating downgrade if the government fails to get its fiscal house in order.
In a statement on Thursday, Fitch Ratings affirmed Zambia’s sovereign risk rating at B, maintaining the outlook on the rating at negative.
“In turn, Zambia could see a rating downgrade if the government fails to get its fiscal house in order or if external balances deteriorate and lead to liquidity shortfalls and macroeconomic instability,” Fitch Ratings stated.
The agency noted that the negative outlook reflected the country’s commodity dependence, weak external liquidity position, large public debt burden and uncertainty regarding the government’s commitment towards fiscal consolidation.
“In June, the Zambian government completed a debt-sustainability analysis which confirmed that the country is currently at high risk of debt distress. While the government subsequently announced that it would curb external borrowing to reduce the budget deficit, details regarding the government fiscal consolidation strategy have not been made available. In turn, the agency stated that these weaknesses are counterweighed by improving macroeconomic stability, and that Zambia’s economic growth has been robust, despite the lingering effects of the commodity price shock and several seasons of drought,” Fitch Ratings stated.
“Furthermore, the banking sector is well-capitalised and inflation remains within the central bank’s target range. The main factors that would lead to the stabilisation of the country’s rating outlook include improved public finance management that leads to a sustained narrowing of the fiscal deficit, together with a rise in international reserves. Why do we care? Public spending pressures will persist as elevated borrowing costs continue to undermine fiscal consolidation progress.”
According to Fitch Ratings, debt service payments account for around a third of government expenditure, which ranks Zambia among the highest in sub- Saharan Africa in this regard.
“Weak revenue streams will exert further pressure on the public purse while a narrowing capital base raises the risk of forced cuts in capex (capital expenditure) and social spending. Poor fiscal discipline is at the root of the on-going stalemate with the IMF, and measures announced in June will be inadequate to meet fiscal targets,” stated Fitch Ratings.

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