American credit rating agency, Fitch, announced on September 24 that it has downgraded Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘CC’ to ‘C’. The country’s senior unsecured foreign currency bonds were also downgraded this week.
This follows the Zambian government issuing a “consent solicitation” to holders of three global bonds (Eurobonds) on September 22, requesting a suspension of debt service payments for six months. This would effectively be covering the upcoming three coupon payments due on October 14, and January and March 2021.
Zambia’s Ministry of Finance stated that the country has been confronted with challenging macroeconomic and fiscal situations aggravated by the Covid-19 crisis. This has severely impacted the country’s public finances.
“A combination of declining revenues and increased unbudgeted costs caused by the Covid-19 pandemic has resulted in a material impact on the Government’s available resources to make timely payments on its indebtedness leading to increasing debt-servicing difficulties,” Fredson Yamba, Secretary to Treasury, said in a statement on Tuesday.
In its report, Fitch stated that should bondholders agree to the suspension in payment, this would constitute a distressed debt exchange (DDE).
“The authorities have indicated that they will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached. However, Fitch judges that there is a high risk of a missed debt payment over the forecast horizon,” Fitch said in its press release.
The Zambian government further said in a statement that they are still engaging with the International Monetary Fund (IMF) to secure financial assistance. The government hopes to create a program of reforms that would help in stabilizing the macroeconomic outlook of the country and restore its fiscal balance.
“In this context, the government is committed to finding a consensual and collaborative resolution to the debt sustainability issues it is currently facing,” Yamba said.
The ‘CC’ rating, which occurred on April 16, due to the sovereign’s constrained external liquidity exacerbated by the pandemic, meant that the country was left in a highly vulnerable position, financially. How will this newly downgraded rating bode for Zambia now?
“The downgrade of Zambia’s rating reflects Fitch’s view that a default event is imminent.”