International rating agency Fitch has revised Zambia’s economic outlook from stable to positive but warned that the deficit may be affected by over-expenditure, a statement obtained on Monday said.
The rating agency has revised the outlook on the southern African nation’s long-term foreign and local currency Issuer Default Ratings (IDRs) to positive from stable and affirmed the IDRs at ‘B’.
The issue ratings on Zambia’s senior unsecured foreign and local currency bonds have also been affirmed at ‘B’, the statement added.
The rating agency said the revision of the outlook on Zambia reflected the fact that the outlook for the country’s public finances was more positive compared with October 2013 when it downgraded the Long-term outlook to ‘B’.
“Early pronouncements from the new administration led Fitch to revise the outlook to negative in February 2012. However, the decision to revoke regulations that were adversely impacting the foreign exchange market is credit supportive,” the statement said.
While acknowledging that the country still faces some risks, especially ahead of the 2016 general elections, Fitch said the business environment had not deteriorated as much as previously expected and the likelihood of significant and adverse policy shifts has significantly reduced.
According to the rating agency, any sustained deterioration in fiscal discipline or external balances as well as a marked deterioration in the policy environment ahead of the elections would result in the outlook being revised to stable.
The rating agency has further warned that the government risks missing its budget deficit target due to extra spending on purchases of maize, the country’s staple crop, and Value Added Tax (VAT) refunds to exporters.
The rating agency, which acknowledged the commitment to expenditure restraint by the government over the first half of this year, the bumper harvest of maize and plans to refund VAT to exporters may result in an overrun on the budget deficit.
The government would be pressured into spending on the extra maize and this would widen the budget deficit beyond the 5.2 percent, Fitch said.
The government is still undecided on whether to pay mining firms 600 million U.S. dollars in VAT refunds, with concerns that it may have a negative on the country’s resources.
The government has already revised the 2014 budget deficit from 6.6 percent to 5.2 percent although Fitch has projected a budget deficit of 5.8 percent and a robust economic growth of six to seven percent.