Zambian kwacha slumps after ‘unsolicited’ Moody’s downgrade

Zambian assets slumped to record lows on Monday, hit by a ratings downgrade from credit agency Moody’s that the country’s government criticised as unsolicited.

The kwacha currency fell 5 percent and Zambia’s short-dated dollar-denominated sovereign debt dropped to 74 cents on the dollar after the cut late on Friday to B2 from B1, which moved Africa’s second-biggest copper producer one notch deeper into non-investment grade territory.

Moody’s cited slower economic growth, low commodity prices, power shortages and expectations of worsening fiscal and debt positions.

While mindful of the need to maintain debt at sustainable levels, Zambian authorities said the downgrade “should be ignored because its correctness was not discussed with any authorized representative of the … government.”

The only rating agencies Zambia had relationships with and engaged with on policy matters were Fitch and Standard & Poor’s, the government said on Sunday in a posting on its Facebook page.

Zambia’s kwacha currency, hit by falls in the price of copper and a domestic power crisis, fell 5.6 percent to a record low of 11.4200 per dollar by 0950 GMT.

“Criticising Moody’s wasn’t the best step to take. A better way would be for Zambia to assure investors that they are taking steps to alleviate the rampant power crisis,” Irmgard Erasmus, Cape Town-based Zambia analyst at NKC African Economics said.

“With the central bank largely on the sidelines we expect the kwacha to continue to spiral unless we see more aggressive action from the central bank. We expect them to tighten liquidity. Absent of that you will see a panic-buying increase.

“The central bank will have to step forward and we also need to see some vocal concern from the government.”

Prices for Zambia’s dollar-denominated sovereign debt also debt hit record lows after the Moody’s move.

Zambia issued a $1.25 billion 10-year Eurobond in July at a hefty 9.375 percent interest rate to finance a budget deficit expected to swell to 20 billion kwacha by the end of 2015 from an initial forecast of 8.5 billion.

HALVED IN VALUE

Moody’s said in Friday’s statement that Zambia had not initiated a rating request and did not participate in the rating process.

It was not immediately available on Monday to comment on the response of the government, which did not react after Moody’s affirmed Zambia’s then B1 rating in May.

Zambian Finance Minister Alexander Chikwanda told Reuters earlier this month the economy was likely to grow by less than 5 percent in 2015 due to the power crunch that has hit output from mining companies already facing a slide in global copper prices.

The kwacha has halved in value over the past 18 months and hit a series of record lows recently amid a sharp selloff in commodity-linked currencies as top global consumer China’s economy has weakened.

The slide has renewed pressure on Zambia to diversify its economy, which relies heavily on copper exports.

Foreign firms running mines in Zambia include Glencore Barrick Gold Corp and Canada’s First Quantum Minerals. (Additional reporting by Mfuneko Toyana in Johannesburg; Editing by James Macharia and John Stonestreet)

Reuters