Fitch doubts Zambia Fiscal Plan, budget should have relied on cutting expenditure

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Chikwanda-ABC-1024x682Fitch expects Zambia’s budget deficit to remain high due to a rapidly falling Kwacha, an ongoing energy crisis and falling commodity prices.

The ratings firm said in a statement that the ambitious fiscal consolidation plan in Zambia’s 2016 budget will prove challenging due to its reliance on raising revenue rather than cutting expenditure.

Finance Minister Alexander Chikwanda announced in his budget address on Friday that he saw the fiscal deficit to narrowing to 3.8 percent of GDP in 2016, from a projected 6.9 percent in 2015, but Fitch said this was unlikely.

The following statement was released by the rating agency) LONDON, October 12 (Fitch

The ambitious fiscal consolidation plan in Zambia’s 2016 budget will prove challenging due to its reliance on raising revenue rather than cutting expenditure, Fitch Ratings says.

Revenue assumptions are optimistic as an energy crisis, falling commodity prices and a rapidly depreciating currency weigh on growth.

In the budget announced on Friday, the Ministry of Finance expects the fiscal deficit to narrow to 3.8% of GDP in 2016, from a projected 6.9% in 2015. This is likely to prove challenging, particularly in an election year.

The authorities expect revenue to rise by 3.1% of GDP in 2016, but this is unlikely due to the lack of significant revenue-raising measures and weak growth.

They also forecast expenditure to remain flat at 25.1% of GDP. We expect the deficit to remain above 6% of GDP in 2016.
The deficit will be financed largely from external sources, including proceeds from July’s USD1.25bn Eurobond.

This should ease pressure on domestic debt markets, where increased government issuance over the past two years has caused yields to rise sharply.

Nevertheless, financing costs will rise to 20% of government revenue in 2016 due to currency depreciation (the kwacha has fallen nearly 50% since the start of the year) and the Eurobond issue, which priced to yield 9.375%.

This is also likely to push debt well above 50% of GDP by the end of the year, from 24.1% in 2012. The proceeds of the Eurobond issue have boosted reserves, which rose to USD3.8bn in July, from USD2.6bn at the start of the year.

But external risks remain high and could intensify, with USD300m in external interest payments due next year if market access becomes more limited or costly for fiscally troubled emerging markets. Macroeconomic challenges may also intensify next year.

Monetary policy will face weak growth and rising inflation due to kwacha depreciation. An end to electricity shortages would boost the economy, and support the mining sector. The rains, expected to begin in November, are critical to this, as low water levels in the Kariba dam have reduced hydropower electricity projections.

A poor rainy season would intensify Zambia’s fiscal and external challenges next year, as would further falls in copper prices, which are down around 10% since January 2015 and nearly 30% since January 2014.