Courtesy of Financial Times
Zambia was one of Africa’s main beneficiaries when China’s economy was expanding at full tilt. With copper its key export, China’s thirst for minerals helped the southern African nation enjoy a decade of economic boom.
But as concern over China’s slowdown triggers a wave of emerging market turbulence, Zambia finds itself at the centre of a storm.
Its currency, the kwacha, has plummeted to all-times lows against the dollar in recent days,and has depreciated more than 30 per cent since January — making it the world’s worst performer after the Belarus rouble, according to Bloomberg.
Zambia’s woes deepened on Monday when Glencore, the mining and commodity group, announced it was suspending production at its Mopani mine for 18 months.
Chinese-owned Luanshya Copper Mines has also said it would suspend operations and cut jobs at its Baquba in Zambia because of the copper price and power crisis.
The situation highlights the vulnerability of Africa’s resource-dependent nations to the fortunes of China. The timing could not be worse for Zambia, with the turbulence coinciding with severe power shortages and political uncertainty ahead of elections next year — the country’s second poll in 18 months.
“It’s a very volatile environment . . . it reflects several things coming together,” says Tobias Rasmussen, the International Monetary Fund’s representative in Zambia. “Zambia has had a whole stream of bad news — being very exposed to the general China situation through copper prices, a pressing electricity shortage and also a smaller [agricultural] harvest this year.”
Zambia is Africa’s second biggest copper producer and depends on the metal for about 70 per cent of its foreign exchange earnings and 25-30 per cent of government revenue.
China accounts for more than 40 per cent of the metal’s global consumption. Copper prices have fallen 18 per cent this year, sliding to a six-year low of below $5,000 a tonne last month on fears that China’s economy could slow further.
As a result, the London-based Fathom Consultancy ranked Zambia top of an index of African nations most exposed to China’s slowdown. In 2012, Zambian exports to China amounted to 4.3 per cent of gross domestic product and Chinese foreign direct investment was 7.5 per cent of GDP, it said.
During the boom years, mining attracted billions of dollars of investment. The sector was a key driver of Zambia’s economy as it enjoyed average annual GDP growth of 6.4 per cent over the last decade — one of the world’s fastest growth rates.
But as well as the copper price slump, mining companies have been hit by policy uncertainty after the government more than doubled mining royalties for opencast mines, before reducing them following industry pressure.
The governing Patriotic Front party — in office since 2011 — wooed voters by pledging to distribute the country’s mineral wealth more equitably, raise wages and improve infrastructure. But now it is struggling to balance the books.
Standard & Poor’s downgraded Zambia’s credit rating in July to B, saying it expected the 2015 fiscal deficit to widen to about 10 per cent of GDP compared to its previous estimate of 6 per cent.
The government has pledged to tighten its belt, but the kwacha’s weakness puts pressure on a widening current account deficit, raises import costs and risks feeding through into inflation. It also increases the cost of the government’s debt service obligations in local terms. In July, Zambia launched a $1.25bn bond, its third such issuance since late 2012.
Lusaka turned to the IMF for help last year, but the death of President Michael Sata in October and subsequent presidential election meant discussions with the fund never gained momentum. With the country gearing up for general elections next year, there are concerns about whether the government will meet its promises of fiscal discipline.
Chanda Mutoni, manager director at Stockbrokers Zambia, says concern among Zambians about the kwacha’s slide is tempered by the view that it is caught up in a global phenomenon. But, “What is maybe of concern is we go into elections again next year, so will there be the fiscal discipline?” he says. “Will the government stick to its budget expenditure?”
The kwacha is free-floating and the central bank has acknowledged that with foreign reserves of about $4bn — if the recent bond is included — it lacks the resources to intervene to prop it up.
Mr Rasmussen says the central bank has done a “commendable job” of attempting to temper the kwacha’s volatility over the past year, tightening liquidity via open market operations and raising the statutory reserve requirements of banks.
Zambia’s authorities can manage the economic turbulence if they implement measures to reassure markets, such as cutting expenditure and raising revenue, he says: “They can manage if they take the needed decisions.”
Edgar Lungu, the president, attempted to address some of the concerns in a statement last week, saying he had directed all government institutions to “rationalise and minimise in all areas that engender foreign exchange costs”, as well as citing measures to address the power crisis.
He also spoke of the need for economic diversification to reduce the country’s dependence on copper –— a tough task that China’s slowdown has thrust to the fore for many resource-rich African nations.
“Difficult as the situation is, it is an ideal time to actualise this structural transformation,” Mr Lungu said. “The challenges the country faces today are real and unprecedented.”