Spat With Moody’s, Spat With Foreign Investment


Ratings play a decisive part in determining how entities (sovereign governments in this case) that issue debt, have to pay (in interest on their issued debt) to access credit markets.

In financial terms, a credit rating is an assessment of the credit worthiness of a debtor  (a sovereign government hereafter). This assessment is made by a credit rating agency of the debtor’s ability to pay back the debt and the odds of default. Credit ratings are determined and assigned by credit rating agency such as Moody’s (of focus here), and other renowned agencies like Standard & Poor’s and Fitch’s.

The credit rating represents the credit rating agency’s evaluation of qualitative and quantitative information for a government; including non-public information obtained by the credit rating agencies’ analysts.

In ratings, a poor credit rating indicates a credit rating agency’s opinion that the government has a high risk of defaulting. Rating is based on the agency’s analysis of the sovereign country’s history and analysis of long term economic prospects.

On 7th November 2012, Moody’s Investors Service assigned local- and foreign-currency issuer ratings of B1 to the government of Zambia. The outlook on the ratings at the time was stable – this stable outlook on Zambia’s B1 ratings reflected Moody’s expectations of continued high economic growth and the maintenance of a farsighted macroeconomic policy framework.

That issuance also meant Moody’s would upgrade Zambia’s ratings if the government’s economic reform and investment programmes were to lead to a material increase in economic diversification and employment. A significant improvement in Zambia’s institutional strength would also exert upward pressure on its ratings. Contrariwise, the issuance meant that Moody’s would downgrade Zambia’s ratings in the event of a sustained drop in global copper demand and prices, resulting in a significant deterioration in the government’s fiscal imbalance and the country’s external position

This year – 2015, on 25th September, regrettably, following the state of the economy, Moody’s Investors Service downgraded Zambia’s government issuer rating to B2 from B1. The outlook on this rating means a change to speculative from stable.

So what does this mean for the Zambian construction industry?

The yield of the construction industry – be it homes, public, commercial etc., has a prime bearing on the ability to sustain a viable economy. Today, sound growth in this industry, is being recorded in Zambia, and predominantly due to investments in the mines, the building of residential housing, road construction and other civil works. But such triumph has a domino effect of increasing or decreasing the contribution of the construction sector to the country’s Gross Domestic Product (GDP, hereafter) depending on how well it performs in a given year.

According to the National Council for Construction (NCC, hereafter) in 2011, the country’s construction sector recorded a 15 percent growth – the NCC revealed that the sector had been recording an average of 17 percent growth in the preceding 10 years.

Speaking at a media briefing in 2011, NCC Executive Director Dr. Sylvester Mashamba said that the statistical representation of the sector’s performance reflected growth which he noted was expected to contribute towards poverty reduction. Dr. Mashamba said the growth trend was expected to continue in view of government’s commitment towards infrastructure development as was reflected in the 2012 budget.

In the year under review, the country recorded US$3.3 billion in foreign direct investment pledges in the first quarter, which was mainly from the construction sector, accounting for US$3 billion. Physical achievements are the completion of the construction of the 45.5 kilometres Chingola-Kitwe dual carriageway, refurbishment of Kapiri Mposhi weighbridge and construction of the East Park Mall at the University of Zambia.



At the time when Moody’s held the nation at investment-worthy grade and when the rating was still at stable, Government augmented the construction expenditure on the Link 8,000 and Pave 2,000 projects which have generously contributed to the sector’s growth.

The outlook on the country’s rating has since changed to speculative from stable, even though the Ministry of Finance has said that a rating of Zambia by Moody’s Investors Service, should be ignored because the grading is unsolicited and against best practice. Meanwhile, Zambia’s rating has been cut one level to B2 – five steps below investment grade.

The ministry’s public relations officer, Mr Chileshe Kandeta said that Standard & Poor and Fitch are the only two agencies with whom the Ministry of Finance engages on policy matters, and data provision and reconciliation. Therefore, the assessment made by Moody’s that Zambia’s credit rating had deteriorated should be ignored because its correctness was not discussed with any authorised representative of the Zambian government.

In my opinion, the government through the Ministry of Finance should have sourced for a good-natured response to the evaluation made by Moody’s, especially that their (Moody’s) findings were only later to be confirmed by Standard & Poor and Fitch with whom they claim to correspond. For issuers’ borrowing costs, the threshold between investment-grade and speculative-grade ratings has significant market implications. Thus, this means that foreign investors rely on data from credit rating agencies, and in foresight, our construction industry might not attract as much foreign investment as it has enjoyed in the past because of the downgrade rating awarded to Zambia as this speculative rating puts the odds of default somewhere above likely to most likely. Sequentially, contribution of this industry to GDP suffers a slump in profits. Evidently, Zambia is contending with its worst ever power shortage and metal prices that have fallen to an all-time low, and this has prompted some companies including Glencore Plc to halt operations (and in turn the kwacha has fallen about 41+ percent against the dollar this year which is a poor performance among the world’s currencies).


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