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The tumbling Kwacha
UNSOLICITED OPINION

Zambia’s economy is in trouble—and the government is lashing out at a rating agency

By Sibusiso Tshabalala

No one likes unsolicited opinions. Last week, on Friday (Sept. 25) the international credit rating firm, Moody’s Investors Service, downgraded the country’s credit rating. On Sunday (Sept. 26), Zambia’s ministry of finance lashed out against Moody’s in a statement on its Facebook page for publishing an “unsolicited” credit rating.

According to the country’s ministry of finance, the Zambian government does not subscribe to Moody’s services and the publishing of last week Friday’s rating was against international best practice, since Moody’s did not consult or seek input from the Zambian government. The statement also called for investors to ignore the rating, and for Moody’s to cease from conducting unsolicited ratings.

It’s been a tough year for Zambia. The country—Africa’s second-largest copper producer—is facing a crippling power crisis that has reduced production by mining companies and has led to job losses in mining—a sector that contributes an average of 11% to Zambia’s GDP. Zambia’s currency, the Kwacha, hasn’t been doing well either. The Kwacha plunged by 41% to the US dollar this year, making it one of the worst performing currencies in the world, according to Bloomberg.

These factors, plus falling commodity prices, high levels of government debt and servicing costs contributed to Moody’s’ decision to downgrade.

The rating shift from B1 to B2 means that Zambia—according to Moody’s assessment—faces a high credit risk. The country’s ”junk status” rating is also likely to make investors twitchy.

“Rating agencies don’t get African economies”

In 2013, global rating agency Standard and Poor’s argued that even economic growth would not necessarily translate into better ratings for African countries. The agency claimed that other factors, like low income per capita levels, political stability, corruption and an over-reliance on commodities contribute to low ratings despite economic progress.

But William Mervin Gumede—a South African political analyst and chairman of Democracy Works—argues that global rating agencies do not understand African economies. (The “big three” ratings agencies—Standard and Poor’s, Moody’s and Fitch—are all based in Western countries.) “With exceptions, credit ratings agencies appear to make little distinction between African countries and their ability to repay their debts,” writes Gumede.

Gumede suggests that, in addition to instituting structural reforms to reduce government debt, improving fiscal prudence and diversifying their economies, African countries could form their own credit rating agencies. These rating agencies would have the advantage of being rooted in the challenges facing African economies, making their findings more credible and nuanced.

But Dr Cees Bruggemans, a South African economist, has doubts. Speaking to Quartz, Bruggemans said: “If we reason like this, everyone else might start arguing for their own localised rating agencies and methodologies. And soon, you might have 200 different credit ratings. Credit ratings are important because they provide investors with comparable information which aids them to make decisions, ” said Bruggemans.