Ratings cut riles besieged Zambia
The steep fall in copper prices and electricity shortages are hammering the kwacha
Zambia’s finance ministry urged investors to ignore an “unsolicited” credit downgrade by Moody’s, but they’re disregarding the plea.
The kwacha, the world’s worstperforming currency this year, extended its slump to the weakest level since Bloomberg started compiling the data in 1994, while yields on the nation’s eurobonds soared to record highs.
The debt has lost 8.6% this month, the most after Brazil’s, out of more than 30 developing nations monitored by Bloomberg indexes.
Moody’s cut its rating for Africa’s second-biggest copper producer on September 25 by one step to B2, five levels below investment grade. Plunging prices for copper, which Zambia depends on for 70% of export earnings, and an electricity shortage will curb economic growth, the company said.
The government said it didn’t provide input before the debt assessment and investors should ignore the decision as it was “against best practice”.
“You can’t ignore what ratings agencies are saying,” said Ronak Gopaldas, a Johannesburg-based credit-risk analyst at Rand Merchant Bank. “Your economy is facing a perfect storm and those headwinds are being reflected in the credit rating, in terms of both fundamentals and sentiment.”
Yields on Zambia’s $1.25-billion of eurobonds due on July 2027 climbed 29 basis points to 12.12% by 12.55pm in London on Tuesday, adding to Monday’s 42-point rise. The yield has soared 275 basis points since the debt was sold in July.
The kwacha weakened 3.4% to 12.4023 a dollar after plunging 9.8% on Tuesday. The Zambian unit is down 39% this quarter, the most out of more than 150 currencies tracked by Bloomberg.
Rejecting the Moody’s downgrade in a statement on Sunday, Zambia’s finance ministry said it only has “rating relationships” with Fitch and Standard & Poor’s, which affirmed the country’s standing on September 25 and kept the outlook as stable.
The Moody’s cut puts Zambia’s rating at the same level as the other two companies.
“We appeal to Moody’s to restrain themselves from imposing assessments on Zambia because the act is inconsistent with international best practice,” the ministry said. “The assessment made by Moody’s that Zambia’s credit rating had deteriorated should be ignored because its correctness was not discussed with any authorised representative of the Zambian government.”
Moody’s only assigns an unsolicited sovereign rating “when confident that we have sufficient info and after consideration of the usefulness of the rating to the capital market”, said Peter Griffiths, a London-based spokesperson for the company. Sovereign ratings also provide an analytical benchmark for debt issuers in a country, such as banks.
The Southern African nation is grappling with its worst-ever power shortage and metal prices that have fallen to six-year lows, prompting companies, including Glencore, to halt operations. Its decision to suspend output at an operation that produced about a quarter of the country’s copper last year has threatened growth, which the government forecasts would reach 5% this year, Moody’s said in a separate report this month. Copper has dropped 27% in the past year.
“Governments don’t like being downgraded, so you can see why the government might try to defend itself,” Stuart Culverhouse, London-based chief economist at Exotix Partners, said in reply to emailed questions.
“If the government spent more time on drawing up a credible policy response and clearly communicating that with the market, it might not be in this position.”
Zambia’s budget deficit is set to grow to 8.4% of gross domestic product this year, nearly double the government’s initial target of 4.6%, according to Barclays. Economic expansion will slow to 3.4% in 2015, the worst performance in 17 years, Barclays said last week.
Investors are looking for assurances that Zambia’s government will continue to curb spending as tax revenue slows, Gopaldas said.
“The government should treat it as a wake-up call and address some of the key issues instead of ignoring it,” he said.
“Investors are looking for a firm commitment to fiscal consolidation, particularly heading into an election year and in the face of external pressures.” — © Bloomberg News