Economic policy changes leave Zambia vulnerable

It’s a heady feeling when the world’s most influential investment bank gives your country such a resounding thumbs up.
Goldman Sachs recently ranked Zambia as the most promising African country in a recent report, arguing that the only question was ‘how’ to invest in the country – rather than when – “given that financial markets are developing very slowly.”
The country has had a good run, with the economy growing 7.3% last year, compared to the 6.8% growth posted in 2011 – and has been consistently one of the fastest growing economies in Africa.
“Zambia’s economy is growing faster than the economies of most of its mineral-producing and non-mineral producing peers,” said the World Bank in its economic brief on the country. “Economic growth has been led by a strong performance in mining, manufacturing, services and agriculture.”
Confident, the country even launched a EUR 750 million, 10-year Eurobond last year, which was oversubscribed.
The success of the sovereign bond has encouraged other Zambian entities such as Road Development Agency to seek a USD 1.5 billion by the end of 2013 to build 2,000 kilometers of new roads. Others like Zambia Railways (USD 500 million), ZESCO (USD 250-USD 500 million) and Lusaka City Council (USD 500 million) are all eyeing bonds, according to Zambia Weekly.

 

Agriculture sector has also contributed to the growth with diversification of production, with a higher share of non-maize crops such as wheat, barley, sorghum and soybean, notes the World Bank.
“Construction growth accelerated in recent years in response to increased demand from rising urban incomes and a marked pick-up in investment in mining and roads. Growth in transport services is also a response to strong demand from other sectors of the economy.”

But the economic success story is in danger of waning. Investors worry about president Michael Sata’s “imperious style”, according to the Economist, and a range of economic policies that are making investors nervous.
“Sweeping policy changes over the past 18 months have created considerable uncertainty in the local business environment,” said Ridle Markus, analyst at Barclays Capital.
“These changes include cutting tax concessions in the mining sector, capping lending rates, doubling mining sector royalties, banning the use of foreign currencies in daily transactions, increasing the minimum wage, new guidelines for mineral exports to better monitor actual exports and a new law [that will take effect on] July 1 (postponed from May 16), that forces companies to temporarily bring back their export earnings to Zambia.”
The government also wants to raise revenues from the mining sector, and Barclays fears that continued uncertainty “could dampen investor confidence and their willingness to invest freely into new projects.”
COPPER PRICES FALLING

 

The falling price of copper, Zambia’s key export, is also adding to the fiscal pressure.

Less-than-robust Chinese growth is lowering copper prices. Capital Economics expects copper prices to fall from the current USD 7,350 per ton to USD 6,500 by the end of this year, as the market remains in surplus.

“Sentiment among traders in China has shifted from short-term bullish to cautious on copper. On the one hand, refined supply remains tight in China due to smelter maintenance and scrap shortage, and physical premiums remained at elevated for domestic spot market and bonded warehouse stocks.”
Analysts expect the country’s copper output to reach 825,000 tons especially after investments in new ores.
“Coupled with a strong focus on infrastructure investment, higher copper output will further underpin growth, offsetting the somewhat disappointing start to the year in the agriculture sector,” said Barclays bank.

 

LACK OF INCLUSIVE GROWTH

The World Bank believes reducing poverty is the greatest development challenge for Zambia.
“The country’s low rank on the HDI (Human Development Index) indicates the vulnerabilities faced by the majority of Zambians: malnourishment, limited education opportunities to improve their conditions, health and water supply and sanitation services… 46.7% of children under-five years are stunted, close to the high levels of the early 1990s.”

Inadequate access to clean and safe water also add to the health risks, as does the lack of healthcare infrastructure and medical supplies.
In addition, farmers face numerous challenges that keep their productivity lower and are unable to break the cycle of poverty.

The country also dropped four places in Doing Business survey from 90 to 94, suggesting business framework may be weakening.
“Labor costs are high while productivity is low,” the bank said. “Both hard and soft infrastructure is poor including energy, transport, telecom, water and also insurance, marketing and professional services — particularly outside the urban areas.”

Lack of road and rail infrastructure is another major problem for a country roughly the size of Turkey, although population is centered around key urban areas.

In addition, access to electricity – a key issue throughout Africa – remains limited, hurting business and economic prospects for many.

In addition to structural issues, Zambia has to contend with some short-term challenges.

“There are downside risks aplenty, with lower copper prices (which could force the temporary closure of some operations), further labor strikes in the mining sector, and a weakening in consumer purchasing power adding to risks,” notes Barclays’ Markus.

 

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