Zambia’s Economic Indicators on a Five-year Rollercoaster Ride
Financial Insight Zambia
We cover Zambia's capital markets like no one else
Gerald Hamuyayi, Lusaka, Friday, 29 March 2024 - The past five years has been nothing short of dramatic for the Zambian and global economy. In 2020, Zambia and the rest of the World faced the COVID19 pandemic, a period of unprecedented hardships characterised by economic turmoil and loss of lives. Key economic sectors such as the tourism, hospitality and entertainment nearly went into oblivion due to government-imposed curfews on citizens while international trade sharply diminished. To cushion the already fragile fiscal vulnerabilities, the Zambian government effected measures such as a moratorium on debt repayment. Nevertheless, the government went into a default on coupon payment as revenue underperformed while expenditures ballooned. To support individuals, businesses and the economy, credit facilities such as the ZMW 10 billion Targeted Medium-Term Refinancing Facility and other expansionary fiscal policies were implemented. Inspired by a recent discussion forum organised by ABSA Zambia and dubbed Absa Economic Outlook Event, this article highlights key themes of the event pertaining Zambia’s rollercoaster five-year run, offering additional insights into the global and regional markets.
As covid eased, economies gradually reopened, the demand for oil surged and crude oil prices rallied from a low of circa US$22.4 per barrel in 2020 to cents shy of US$122 a barrel in 2022. Price has since retraced and stood at $81.24 as of 25 March 2024, according to Bloomberg data. Additionally, Geopolitical risks arising from Russia's invasion Ukraine, one of the largest suppliers of agricultural produce on the global market, led to disruptions in the food supply chain. Furthermore, sanctions on Russia, the world's dominant player in the global oil market, propelled crude prices to the ceiling.
As fuel prices escalated, inflation in major and emerging markets clinched double digits, breaking historical records. To curb runaway inflation, a global interest rate hike commenced as Central Bankers sought to kill demand in their respective economies. US Fed Chair, Jerome Powell, and his European counterpart, Christine Lagarde, raised benchmark rates to cool inflation. The rate hike however threatened the global financial system via contagion as weakly capitalised and diversified banks such as Silicon Valley Bank, Signature Bank, and First Republic, went bust, exposing the banks' asset liability management (ALM) due to exposure to distressed bond assets.
The Fed interest rate hikes and growing global uncertainty disrupted economic fundamentals in emerging and developing markets as investors rushed for safe haven United Stated dollar denominated assets. Despite being in default, the Zambia's currency was largely supported by the regime change as confidence in the economy improved inflows propelled by improved investor sentiment. The country's debt burden, described by ABSA CEO Mizinga Melu, at Event as the "Elephant in the Room," added to the complexities of economic recovery efforts.
ABSA Group Senior Economist, Markus Riddle, in his keynote presentation to the same discussion forum, ?highlighted diverse fortunes of African economies with further insights on the economic outlook. West African countries such as Senegal and Ivory Coast have recorded robust growth projected at 6% to 8% this year driven by higher oil earnings. On the downside, Nigeria's inflation for February 2024 hit 31.7%. To curtail it, Nigeria's Central Bank raised the policy rate by 200 basis points on March 26. In East Africa, growth averaged slightly over 5% in 2023, driven by a rebound in agriculture following the region's worst drought in 40 years the previous year. Southern Africa is confronted by macro-economic headwinds, with Angola being debt distressed. Botswana is also exposed to low diamond demand amidst US and China's slowdown. In Mozambique, insurgency in the North threatens the country's economic prospects, while South Africa recorded a modest growth of around 0.5%.
The Zambian market is expected to encounter macro-economic pressures as the country is challenged by the 2023/2024 drought which President Hakainde Hichilema declared a national disaster. On the upside, significant progress towards a debt restructure deal with the Eurobond holders has enhanced has enhanced confidence in the Zambia economy. Zambia's progress through the framework will benchmark potential relief metrics for countries such as Ghana and Ethiopia under the same debt treatment program. Further, the conclusion of the debt will lead to better fiscal, monetary and other economic outcomes.
The construction and the tertiary sectors have been resilient throughout 2023. On the downside, the agriculture and mining sectors underperformed, ebbing by over 6% and 9% respectively. Furthermore, businesses conditions in the manufacturing sector lingered in the contractionary territory with the Purchasing Managers Index averaging 49.9. Zambia’s GDP growth for 2023 was forecast ?to hit 5.0%, down 0.2% compared to 2022 growth.
The energy sector, a key driver to economic activities will underperform this year as dam river flows are lower than last year resulting from the 2023/2024 El Ni?o induced drought. The nation's utility, ZESCO struggles to optimise power usage by rationing; the utility plans to request mines to reduce energy demand by as much as 20% to 25%, while household are under an eight-hour load shed. Given these downside risks arising from the drought, the IMF visit to Zambia tentatively mid-April aims to assess the impact.
The external balance pressures will heighten as Zambia plans to import over 100,000 tonnes of grain from Tanzania and Uganda in response to shortfalls on the supply side. Additionally, copper earnings are expected to ebb due to constrained production resulting from power cuts, thus worsening the external balance. On the upside, the significant progress in the resolutions of issues at Mopani and KCM, as well as the recovering copper prices, will offset these downside risks. The long-term outlook of the sector remains positive. The current account is forecasted to record a surplus of approximately 1% in 2024, up from a deficit forecasted at 1.9% in 2023.
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In the near term, currency pressures will persist due to external balance risks. Despite the currency risks, the Bank of Zambia is constrained to use the reserves to support the currency while the country is on an Extended Credit Facility. Without interventions or significant fundamental changes, the rate may slide to almost ZMW30 per USD as suggested in the derivative forwards markets. Absa bank priced in a potential 50 basis points policy rate hike this year depending on the currency and inflation outlook. On the positive, significant progress in debt restructure will result in the currency stabilising and pulling back to ZMW 26.5 by year end.
On March 25, 2024, Zambia clinched a preliminary deal on its US$3 billion Eurobonds debt, enhancing investment sentiment that will support the currency in the near term. According to Reuters, Zambia's 2027 sovereign note firmed 1.8 cents to 73.85 cents on the dollar after the announcement.
"History has been made! We are pleased to announce the agreement with our Eurobond holders," President Hakainde Hichilema posted on the social media platform X. Surface details of the latest deal involves the swapping of the three Eurobonds into two amortising bonds with extended tenors, lower sustainable coupons and a grace period. A successful completion of the process will improve fiscal space, address some existing economic challenges, and restore stability in the financial markets. Furthermore, Zambia's restructuring parameters will be precursors to the debt treatment of distressed economies under the G20 common framework.
Speaking on the panel, PwC Senior Partner, Andrew Chibuye described the current economic situation as challenging and almost a perfect storm. According to the PWC’s Zambia Mining Report, copper production has declined from 804,000 metric tonnes in 2021 down to 764,000 in 2022. In 2023 copper output sunk further south to 682,000 tonnes, with earnings supported by elevated commodity prices on the London Metal Exchange. This has largely been due to underinvestment in mining exploration, attributed to poor policies such the non-deductibility of mineral royalty, a legitimate business expense for tax purposes.
Recently, KoBold metals aided by Artificial Intelligence technology discovered enormous copper deposits at Mingo'mba mine and is poised to become one of the largest copper mines in the World. KoBold alone invested more than what was invested for a number of years. Other potential mining investments include, $1.35 billion investment in a nickel project by First Quantum Minerals, $2 billion capital injection by Barrick while KoBold Metals has invested about over $150 million in mining exploration at Ming’omba Site. These capital injections will revamp the mining sector with positive cues in the gemstone production also fuelling the sector’s recovery.
The monetary policy outlook has and remains volatile leaving forecasters blinded on potential direction. In the first quarter of 2024, the Bank of Zambia hiked statutory reserve ratio and the policy rate by 900 bps and 150 bps as it maintains a hawkish monetary stance. Following these measures, the currency appreciated rapidly. However, questions of sustainability arise as the kwacha reversed some gains from the February 20th exchange rate high of 22.62 after a 17% appreciation against the dollar from its record low of 27.25. This volatility in the FX market makes planning difficult for business dealing in foreign currency. The underdevelopment of the derivative markets in the Zambian financial system exacerbates the currency risks. Further, the drying liquidity of dollars in the FX market constrains access to dollars as businesses demand for dollars outstrip supply. It is also important to highlight that while on the IMF Extended Credit Facility (ECF), the Bank of Zambia is limited on its use of reserves to intervene in the foreign exchange market.
As Zambia is caught across the downside and upside risks, volatility in the macroeconomic fundamentals persist, requiring businesses to continually adapt or face extinction. To successfully circumvent these challenges while harnessing the opportunities, a deeper dialogue among the government, regulators and the private sector is essential. The sooner Zambia diversifies its energy mix, the better for the economy as this will reduce overdependence on hydropower. Further, the development of additional financial instruments in the derivative markets to manage risks, including currency risk, cannot be overemphasized. The absence of such instruments has often led to credit growth driven by distressed borrowing to survive the storm rather than borrowing for business expansion projects. The non-development of such financial instruments will continue to cap Zambia's economic growth potential.