Moody's lowered on May 29 its outlook on Zambia's B1 government bond rating to negative on concerns about the copper producing country’s rapidly rising debt burden coupled with a shift of the current account into deficit.

Zambia’s debt-to-GDP ratio is expected to rise to 39.6% at end-2015 from an estimated 31.1% in 2014, on a no policy change basis, according to the IMF. Debt growth is driven by a large fiscal deficit, projected at 7.7% of GDP in 2015, and a sharp weakening of the exchange rate inflating the size of foreign currency-denominated debt.

“We expect a number of additional revenue-generating and cost-reduction measures to be announced in the mid-year budget update aimed at compensating for this year's deterioration in the fiscal position, meaning the deficit and debt outcomes should ultimately be lower than these projections,” Moody’s said in a statement. However, it warned that implementation risk is high, given a trend of missed fiscal targets and spending pressures in the lead up to next year's presidential election.

The agency underscored that the recent shift of the current account into deficit, stemming from the decline in the trade surplus and fiscal imbalance, removes one of Zambia's key credit supports that used to suppress external vulnerability. In addition to the drop in global copper prices, Zambia is pressured by weaker investor sentiment and depleting foreign exchange reserves.

The affirming of B1 rating acknowledges Zambia's credit profile will remain in line with peers at the B1 level should these credit-negative trends dissipate or reverse in the next 12-18 months, Moody’s said.