Zambia accuses Moody’s of unethical rating downgrade

By bne IntelliNews September 28, 2015

Moody’s downgrade of Zambia's sovereign rating by one notch to B2 on September 25 was followed by a strong outcry by the country’s finance ministry, which stressed that the credit rating agency has no contract with the Zambian government, so its assessments are unsolicited.

“We appeal to Moody’s to restrain themselves from imposing assessments on Zambia because the act is inconsistent with international best practice governed by contractual obligations between the credit rated entity and the rating agency,” the ministry said on its Facebook page.

It underscored that despite Moody’s previous “frantic attempts for a formal arrangement” the government has subscribed to the services of Fitch and Standard & Poor’s only, as it considers them sufficiently competent to provide the required independent rating assessments. Thus, Moody’s judgement of a worsened credit profile of the country “should be ignored because its correctness was not discussed with any authorized representative of the Zambian government”.

In its review, Moody's cited expectation of a sustained deterioration in fiscal and debt metrics over the next 3-5 years given the challenges stemming from a lower growth environment amid an extended period of weak commodity prices, constrained copper production, and domestic electricity shortages hampering business activity. It changed its outlook on the ratings to stable from negative, acknowledging the country’s track record of political stability, responsive monetary policy, and banking system stability.

After the downgrade from B1 to B2, Moody’s rating on Zambia came to match the B assessments by both Fitch and S&P. Fitch lowered Zambia from B+ (the equivalent of Moody’s B1) already in October 2013, while S&P followed suit in July 2015. Fitch affirmed its assessment in August, while S&P made the same also on September 25.

Although keeping its outlook on Zambia stable, S&P warned of heightened pressure on the country’s fiscal and external performance, given its updated assumption of even lower copper prices, the continued weakening of the kwacha, which has lost some 50% of its value versus the US dollar since the beginning of 2015, as well as continued power shortages resulting from poor rains.

On July 23, Zambia sold a $1.25bn Eurobond, its third, below an initially announced target of between $1.5bn and $2.0bn despite ample demand, as the yield spiked to 8.97%. The Eurobond has an 11-year average life with repayments in 2025, 2026 and 2027. The yields have climbed to 11.4% presently from about 9.4% at the beginning of August, according to Bloomberg.

Moody’s has not replied to the accusations so far.

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