Fitch to improve Zambia’s default rating

By BUUMBA CHIMBULU
FITCH Ratings has indicated that it will move Zambia’s Long-Term Foreign-Currency Issuer Default Rating once a debt exchange is agreed and relations are normalised with international creditors.
The rating agency has however acknowledged that the staff-level agreement between the International Monetary Fund (IMF) and Zambia’s government on an extended credit facility (ECF) marks an important step forward in the country’s debt-restructuring process.
According to the rating agency, Zambia’s default was the result of long-term fiscal trends and several years of external debt accumulation.
It anticipated that weaknesses in public financial management were likely to remain despite signs of willingness to undertake fiscal reform.
“Fitch views the shift in the government’s focus to debt sustainability and macroeconomic stability under the new administration as credit positive.
“However, we would only look to move Zambia’s Long-Term Foreign-Currency Issuer Default Rating out of ‘RD’ once a debt exchange is agreed and relations are normalised with international creditors,” it stated in a statement.
It also believed that adjustments to Zambia’s food and energy subsidies would be an important element of any significant fiscal reform framework.
The rating agency acknowledged Zambian authorities’ efforts to form an official creditor committee in the first quarter of 2022.
The committee will use an IMF/World Bank Debt Sustainability Assessment (DSA) to assess the need for debt treatment.
The key parameters of the treatment will be enshrined in a memorandum of understanding (MoU).
Agreement on an MoU could clear the way for Board approval of the ECF by the end of the first quarter of 2022.
Fitch has therefore stated that the MoU would also provide the basis for negotiations with private creditors, as a CF deal with bilateral creditors would require comparable treatment by commercial external creditors.
“Eurobond investors hold approximately 40 percent of Zambia’s external debt, unlike other countries attempting a CF restructuring. If the investors are unwilling to accept the MoU’s terms, that could delay the process.
“Bond investors’ reluctance to agree to the government’s consent solicitation to pause interest payments was a precursor to Zambia’s November 2020 default event,” Fitch stated.