On 25th August 2017, Bank of Zambia and the Ministry of Finance must have been on a conference call with Secretary to the Treasury following the announcement from Standard & Poor’s Financial Services LLC (S&P) on Zambia being upgraded to a positive credit rating B (B/Stable/B) from negative territory. We would like imagine this was the case because the trio had worked tirelessly on policies that many skeptics argued were not enough to ensure a turnaround. Proven wrong they have. The trio deserve a cognac for the systematic approach they have taken to recovery. S&P has noticed and so have we. The implications of a stable rating means that in the opinion of S&P, the rating is not likely to change in the intermediate term (typically six months to two years).
Zambian premier companies are at an interesting point in our financial history. When access to cheap debt becomes such an expensive endeavor, the credit ratings agencies may offer an answer. From a local perspective, a credit rating agency may be considered to be analogous to the proverbial Credit Reference Bureau (CRB). However, it is far from it. Ratings companies go further than the work of a CRB in that they are an important enabler for borrowers to gain access to loans and debt. Good credit ratings allow borrowers to easily borrow money from a plethora of financial institutions or public debt markets outside Zambia (FDI). Just like at a national level, the B rating means that the ratings agency now has confidence in Zambia’s capacity to meet its financial obligations. However, the rating does come with a caution in that adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments. Hence the trio’s ferocious approach in monitoring the microenvironment. With this in mind, we expect foreign direct investment (FDI) in Zambia to be more confident going forward. This is one of the inherent benefits of possessing a favorable rating as it attracts investments into the country. As we had indicated in our review of the last rate revision by Bank of Zambia’s MPC, FDI has a notable impact on the country’s exchange rate stability.
For rating agencies such as S&P, they decode the nuances through observations of the policies that come from all stakeholders. According to S&P, Zambia’s economic growth prospects appear to be improving, although these factors remain largely outside the authorities’ immediate control. However, they also argue that the stable outlook balances an improving macroeconomic picture against a number of negative rating pressures, including a still large fiscal deficit and substantial debt stock.
Conversely, premier companies in Zambia should consider corporate credit ratings. Professional Insurance is one company we have reported to have a credit rating that they are proud of. Once rated, it is the opinion of the rating agency regarding the likelihood that a corporation will fully meet its financial obligations as they come due. This gives confidence to lenders and an idea of how well that companies securities are likely to perform. This is the financial health that investors also look at when they are considering making an investment in a firm. We believe all companies on LuSE should aspire to get credit ratings especially those that seek investment from FDI.
