Foreign currency debt increased markedly during the last years to some 45% of GDP in 2018. It has financed a persistent fiscal deficit (forecast at -8% of GDP in 2018), partly explained by decreasing fiscal revenues (from 19% of GDP in 2014 to 16.5% forecast in 2019). Bilateral debt was the main contributor to the increase in total external debt (of which Chinese creditors hold 30%). As a result, the ZMK was one of the currencies that depreciated the most during the last month (-17%). The Central Bank had no possibility to soften it since foreign reserves are very low (covering just 1.8 months of imports). This has raised liquidity and debt rollover risks: the ratio of debt due to foreign reserves has reached 80% and the yield on the 2024 USD bond increased by about 1,000bp YTD to 16.5%. These credit constraints already weigh on the economy as reflected in the PMI drop to 48.6 in September. Imports rose +30% y/y in H1 but should soften in H2. We expect +2.5% GDP growth in 2019 (+3.7% in 2018).
