Moody's Investors Service has assigned local- and foreign-currency issuer ratings of B1 to the government of Zambia.
The outlook on these ratings is stable.The B1 ratings reflect the following key factors:
1) Expectation of continued rapid growth, which should support economic diversification and over time increase the country's low wealth levels.
2) The country's track record of political stability, which benefits its developing institutional strength.
3) Zambia's low albeit improved financial strength, following debt forgiveness from official creditors in 2006.
At the same time, Moody's has assigned Zambia a Baa3 local-currency country risk ceiling, which is the maximum credit rating achievable in local currency for a debt issuer domiciled in that country. Moody's has also assigned Zambia a Ba2 foreign-currency bond country ceiling and a B2 country ceiling for foreign-currency bank deposits. These ceilings are lower than the local-currency ceiling as they also capture foreign-currency transfer and convertibility risks.
The first key factor underlying Moody's assignment of a B1 rating to Zambia is our expectation of a continuation of the rapid economic growth that the country has enjoyed in recent years due to buoyant global copper prices and production, combined with growing foreign direct investment (FDI).
Moody's expects Zambia's economy to grow by 7.3% in 2012, up from 6.6% in 2011, on the back of strong growth in copper and agricultural output, in addition to the government's expansionary fiscal stance.
GDP growth averaged 6.5% over the past five years, reaching a peak of 7.6% in 2010.
Zambia's strong economic growth performance however is balanced against a low per capita GDP on a purchasing power parity basis, relative to its B1-rated peers, and an undiversified economic base in which subsistence agriculture accounts for around 70% of employment.
The second key factor supporting Zambia's B1 ratings is the country's track record of political stability which, in turn, benefits its developing institutional strength.
This was highlighted by the peaceful transfer of power to the current administration last year, following two decades of political dominance by the previous Movement for Muli-party Democracy government. Moody's expects the current government to continue to implement prudent macroeconomic policies, with an emphasis on attracting FDI, alongside a commitment to increasing employment and improving social conditions.
However, structural constraints such as widespread poverty continue to hinder the country's institutional development, as reflected in its relatively low scores on the World Bank's indicies for 'government effectiveness' and 'rule of law'.
The third key factor underpinning Zambia's B1 ratings is our expectation that the government's low financial strength will continue to improve.
In 2006, the country benefited significantly from an official debt forgiveness initiative.
General government debt as a percentage of GDP stood at 26% in 2011, compared to 88% in 2005, a year before debt forgiveness.
Although the current government is committed to a policy of fiscal prudence, the country faces significant spending pressures due to public-sector labour demands for higher wages, social spending needs and large-scale infrastructure requirements.
In April 2012 for instance, the government granted higher-than-budgeted increases in basic salaries to government workers.
Moody's expects Zambia's to post a budget deficit of 4.1% in 2012, compared to 3% in 2011.
The stable outlook on Zambia's B1 ratings reflects Moody's expectations of continued high economic growth and the maintenance of a prudent macroeconomic policy framework.
Moody's would upgrade Zambia's ratings if the government's economic reform and investment programmes were to lead to a material increase in economic diversification and employment.
A significant improvement in Zambia's institutional strength would also exert upward pressure on its ratings.
Conversely, Moody's would downgrade Zambia's ratings in the event of a sustained drop in global copper demand and prices, resulting in a significant deterioration in the government's fiscal imbalance and the country's external position.
The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2008.