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TEXT-S&P assigns 'B+' rating to Zambia's $500 million eurobond
September 13, 2012 / 8:00 AM / 5 years ago

TEXT-S&P assigns 'B+' rating to Zambia's $500 million eurobond

(The following statement was released by the rating agency)

Sept 13 - Standard & Poor’s Ratings Services said today that it has assigned its ‘B+’ long-term senior unsecured debt rating to the proposed $500 million bond to be issued by the Republic of Zambia. At the same time, we assigned a recovery rating of ‘3’ to the proposed bond, indicating our expectation of meaningful (50%-70%) recovery in an event of payment default. According to our criteria, we rate bonds with a ‘3’ recovery rating at the same level as the issuer credit rating. The rating on Zambia’s upcoming bond is therefore equalized with the ‘B+’ long-term foreign currency sovereign credit rating.

The ratings on the Republic of Zambia are constrained by our assessment of its fairly low income levels; we estimate GDP per capita at $1,510 in 2012. In addition, the balance of payments is vulnerable to swings in copper prices (copper accounts for about 80% of exports) and the government’s economic policy direction since the October 2011 elections remains uncertain. The ratings are supported by promising investment and economic growth trends, a fairly strong external balance sheet, and moderate general government debt, which has benefited from debt relief and nominal GDP growth.

We believe some cabinet members’ apparently uncoordinated and sometimes contradictory views have added to economic policy uncertainty. This relates in particular to windfall tax, export tracking, and the government’s participation in the mining sector. We view positively the government’s objective to promote good governance and transparency. However, its reversals of several privatizations on the grounds of a lack of transparency and flawed processes may be perceived as politically motivated. In our view, this could dampen investment and growth if investors think the investment climate is deteriorating.

The 2012 budget is expansionary, with a significant increase in capital expenditure, but we expect the deficit to narrow in 2013. The projections assume that slippages in current expenditure, in particular wages and subsidies, are limited. We estimate that liquid external assets exceeded the debt portion of external liabilities by 12% of current account receipts in 2011. Monetary policy flexibility is limited by Zambia’s moderately high use of the U.S. dollar as a transaction currency.

We forecast a good performance for Zambia’s economy this year, with real per capita GDP increasing by slightly more than 5%. The economy has been buoyed by an exceptional maize harvest in 2011, high copper prices, and strong investment in the mining sector. We project average annual inflation will decrease to about 6.5% in 2012 from 8.7% in 2011. Due to lower copper prices, we estimate that the current account surplus will be slightly negative in 2012. The general government deficit is expected to widen to 4.1% of GDP compared with 3.5% in 2011. We expect real per capita GDP growth to remain close to 5.0% over the medium term, supported by copper prices and generally prudent policies.


In our recovery analysis on the proposed bond, we use a hypothetical event of default as a starting point. If the government were to default, we believe this would likely be due to an external shock. Under our default scenario, after a very sharp and lasting drop in copper prices, external imbalances would build up and Zambia would quickly run down its reserves, so that ultimately the government might default on an external debt payment. Under that default scenario, we expect that Zambia’s recovery ability would remain above average. This is because general government debt remains low and would increase only moderately due to the low exposure of fiscal revenue to copper exports, and at the same the correction of external imbalances would happen by exchange rate and import adjustments. Under the default scenario, Zambia’s policy framework may become less market-oriented, and relations to official lenders may weaken.


-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011

-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

-- Introduction Of Sovereign Recovery Ratings, June 14, 2007

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