Crowding out projected to ease
Banking, Economy

On 26th January 2018, Moody’s Investors Service announced that it had revised the rating outlook for the Government of Zambia to stable from negative and affirmed its B3 long-term issuer rating. Finance Minister Felix Mutati will be most pleased with this development as the measures his economic and finance team’s put in place are beginning to bear fruit.

In their statement, “the stable outlook reflects reduced government liquidity pressures and a slowdown in government debt accumulation which Moody’s expects to continue”. However, Moody’s also pointed out that although the B3 rating balances a strong growth potential boosted by ample natural resources and a young and growing population there are still continuing credit challenges such as debt burden, foreign exchange ties, low debt affordability and delays in fiscal implementation programs.

Some of the measures that led to the revision of the rating included fiscal policy changes around subsidies (removal of fuel and reduction in farmer subsidies), increase in electricity price (75% in 2017) and phasing out of the fuel distribution business. The saved the Government approximately 2% of the 2016 GDP.

It has been the complaint of many small businesses when it comes to accessing finance (with banks pursing risk averse fixed income from Treasury Bills and Government Bonds) is very difficult. Many of these institutions are not prepared to try out untested business plans which is ironic albeit ubiquitous in emerging economies with analogous fiscal challenges such as ours. However, with the current indicators, small business have some hope that this will ease from them being crowded out.

With the gradual reduction in issuance of government debt, commercial banks will inevitably be forced to seek out further business with small and medium sized businesses. Should the outlook remain stable for the medium term, financial institutions will adopt new strategies in the era of reduced appetite for government debt. FiZ is optimistic.

Although, the IMF made recommendations that pointed to a reduction in appetite for credit, this Moody’s credit rating is an important tool for borrowers to gain access to loans and debt. Good credit ratings allow borrowers to easily borrow money from financial institutions or public debt markets. Furthermore, the opinions by the rating agencies such as Moody’s tend to have an important effect on the cost of financing for governments and companies. Hypothetically, if the benchmark 10-year Government Bond is ever issued by Zambia when it attains a high investment grade rating (FiZ is that optimistic!), this would attract very low interest rates.

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