March 1, 2012 / 3:56 PM / 5 years ago

TEXT-Fitch revises Zambia's outlook to negative

 (The following statement was released by the rating agency)	
 March 1 - Fitch Ratings has revised the Outlooks on Zambia's Long-term
foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable
and affirmed both ratings at 'B+'. Fitch has simultaneously affirmed Zambia's
Short-term IDR at 'B' and Country Ceiling at 'BB-'.	
	
"The revision of Zambia's Outlook to Negative reflects the agency's concerns
about some of the government's recent actions and announcements, which bring
into question the direction of economic policy," says Carmen Altenkirch,
Director in Fitch's Sovereign ratings group. "The recent decision to reverse a
privatisation deal without as yet compensating the investing parties could
undermine property rights, while planned reforms of the mining and banking
sectors could risk unintended consequences in terms of their potential impact on
investment, and consequently on the growth outlook and macro-economic
stability," added Ms Altenkirch.	
	
The authorities' intentions to implement reforms fight corruption and reverse
perceived flawed decisions made by the previous administration are creditable,
but in Fitch's view the speed and direction of current policy making increases
the risk of policy mis-steps. However, Fitch is aware that policy direction may
moderate as the government assesses market reaction to its initial decisions.
The government's decisions to reverse the privatisation of ZAMTEL and
investigate the privatisation of ZANACO represent perhaps the most worrying
recent development.	
	
A further concern surrounds a recent announcement by the Central Bank to
significantly increase the minimum capital requirements for the banking sector.
Although the government's objective of increasing the size and capitalisation of
the banking sector is laudable, Fitch is concerned about the potential impact on
asset quality, inflation and foreign bank participation in the sector. Comments
from senior government officials about the possible re-introduction of the
contentious windfall tax as well as increasing the government's stake in all
mines to 35% highlight a further area of significant policy uncertainty.	
	
Zambia's economic performance has continued to improve over the past decade,
with growth averaging 5.4% over the period and 6.8% during the past five years,
well above the 'B' median. The economy has benefited from a more stable
macroeconomic policy environment, an improved business climate, as well as a
rapid increase in copper prices, which has underpinned rising foreign direct
investment in the mining industry. The prospects for growth beyond 2012 are less
certain. Growth in mining production could be constrained by weaker growth in
China, Zambia's main export destination, as well as persistent capacity
constraints.	
	
However, if the new Patriotic Front (PF) government's policy framework
ultimately remains broadly unchanged from that of the previous government, with
a continued focus on sound monetary and fiscal policy, as well as continued
efforts to improve the business environment, a more favourable medium-term
growth outlook is possible.	
	
The budget for the 2012 fiscal year, released shortly after the new government
came into power, reflects a slightly more expansionary stance. The deficit is
expected to widen to 4.4% of GDP in 2012, up from 3.1% in the previous fiscal
year. The government forecasts a material reduction of the deficit in 2013,
falling to 1.2% of GDP, but Fitch views this target as optimistic, given that
constraining current expenditure while dramatically improving the tax take is
likely to prove challenging. As a result, Fitch currently forecasts a deficit of
2.2% for 2013. The greatest risk to government finances, over both the short and
medium term, arises from a potential failure to curb current expenditure,
particularly on wages, which consume 43% of government revenue, at the expense
of capital spending needed to improve the long-term productive potential of the
economy.	
	
The government plans to issue a USD500m Eurobond later this year, which will be
used to fund investments in road and energy infrastructure. As a result, total
public debt will rise above USD2bn in 2012 or 22% of GDP. Additional borrowing,
particularly at non-concessional rates, needs to be invested in projects with a
high economic rate of return.	
	
Fitch will continue to monitor the government's actions and policy announcements
closely over the next 12 months. Any crystallisation of Fitch's concerns over
policy direction that leads to a weaker investment environment with negative
implications for growth would likely result in a downgrade of the ratings.
Conversely, evidence of a fiscally responsible policy framework,
growth-supportive infrastructure investment and progress on deficit reduction in
line with targets could result in a revision of the Outlook to Stable.	
	
Contact:	
Primary Analyst	
Carmen Altenkirch	
Director	
+44 (0)20 3530 1511	
Fitch Ratings Limited	
30 North Colonnade	
London E14 5GN	
	
Secondary Analyst	
Richard Fox	
Senior Director	
+44 (0)20 3530 1444	
	
Committee Chairperson	
Tony Stringer	
Managing Director	
+44 (0)20 3530 1219	
	
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
peter.fitzpatrick@fitchratings.com.	
	
Additional information is available at www.fitchratings.com.The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable criteria, 'Sovereign Rating Methodology' dated 15 August 2011, are
available at www.fitchratings.com.	
	
Applicable Criteria and Related Research:	
Sovereign Rating Methodology	
	
 (New York Ratings Team)	
 

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