By KAIKO NAMUSA –
ZAMBIA’s strong economic growth and robust Government fiscal strength continue to support its B1 stable credit profile, Moody’Investors Service announced in its latest annual Credit Analysis report.
Moody’s senior credit officer, Matt Robinson however said the rating agency noted that the small size and relatively undiversified nature of Zambia’s economy meant that it was vulnerable to adverse conditions in the agriculture sector and volatility in global copper prices.
The rating agency’s report issued on Monday, this week, is an update to the markets and does not constitute a rating action.
“Zambia’s economy continues to register robust growth rates, averaging 7.8 per cent per annum in real terms since 2005. We expect that economic growth will remain at around the same level in the coming years, supported by the development of infrastructure projects.
“The government’s fiscal position is also strong, though deficits have increased and high dependence on a single export commodity, copper, leaves Zambia exposed to adverse price movements,” Mr Robinson said.
According to Moody’s, with nominal Gross Domestic Product (GDP) estimated at US$26.3 billion in 2014, Zambia’s economy was on par with the Sub-Saharan Africa median, but ranks below the median for B1-rated sovereigns globally.
Zambia’s GDP was rebased to 2010 prices in February 2014, and preliminary estimates suggested that the economy was now 25 per cent larger than previously thought.
“Although high poverty levels, income inequality and limited economic diversification – with agriculture, forestry and fishing accounting for more than 70 per cent of employment – continue to constrain Zambia’s credit quality, ongoing government efforts look to address the country’s infrastructure deficiencies.
These include projects to develop connectivity, raise power output, and to improve productivity in the agriculture sector,” he said.
As a result, Moody’s expected that Zambia’s real economic growth would likely remain strong, rising above seven per cent in 2015, slightly higher than the government’s estimate for 2014 of more than 6.5 per cent.
Copper production and related sectors contributed 25-30 per cent to the country’s GDP and generated the majority of current account receipts, leaving it exposed to adverse copper price movements and a slowdown in Chinese growth, as China accounted for the majority of copper exports.
In addition, Moody’s said facing growing pressure from the population, for a greater share of mining sector wealth, the government’s approach and recent policy actions, such as a change in the mining tax regime, ran the risk of deterring foreign investment.
Nonetheless, Zambia’s fiscal strength remains fairly high, supported by a balance sheet carrying a moderate level of public sector debt at around 32 per cent of GDP.
An expansionary fiscal policy since 2011 had placed Zambia’s debt on a strong upward path, with a 6.7 per cent of GDP deficit in 2013 sharply contrasting with the deficits of below two per cent on average for most of the decade up to 2011, though the government had committed to slowing expenditure growth and the rise in the public debt burden.
According to Moody’s so far, the government’s commitment to fiscal consolidation was holding
The fiscal performance through the first half of 2014 was roughly on par with budget, though the original deficit target of 5.2 per cent of GDP had since been relaxed to 5.5 per cent in the 2015 Budget.
Moody’s observed that pressure on the fiscal position would continue amid growing demand for higher public sector wages and development expenditure, particularly in the areas of education, health and infrastructure.
Adding that going beyond the presidential by-election in January 2015, the pressures would undoubtedly be amplified in the lead up to the 2016 general elections.
“Zambia’s increasingly noisy political scene, which despite relative stability over the past five decades, presents rising risk to policy predictability, the investment climate, and Foreign Direct Investment,” the rating agency said.