SA based Independent economists downgrade Zambia’s Political risk rating

∙         President Michael Sata’s regime is losing the plot

∙         Actions against Vedanta subsidiary look petty and irrational

∙         Justifies a political risk downgrade on top of previous concerns

President Michael Sata and his Patriotic Front (PF) government seem determined to flush Zambia’s economy down the drain. The old, muddled expression of ‘those who the gods wish to destroy…’ seems to be the only fitting description of Zambian behaviour towards foreign investors in recent times. Logic, reason, policy and even populism fail to adequately explain the Sata regime’s suicidal thinking.

Another old expression, the one about the camel’s back, comes into play and NKC Independent Economists has decided to downgrade its political risk rating for Zambia. As a consequence, the rating moves from ‘low’ to ‘low tending moderate’. Trend lines stay negative, implying that a further downgrade is likely at a later date. This follows several months of risk trending negative.

When President Sata took the reins of power in Zambia, the old curmudgeon immediately began to act on long-held grudges, pursuing a vendetta of revenge and campaigning against real and perceived enemies who had made his life a misery while he was in opposition. His eccentric and vindictive campaigns were often cloaked in an anti-corruption blanket and since his actions did not appear to have significant implications for broad economic policy, his determination to protect Zambians from foreign exploitation and unfair labour practices was tolerated.

According to recent
Reuters reports, Zambia has revoked the work permit of the chief executive of Konkola Copper Mines (KCM), owned by London-listed Vedanta Resources, following a row between government and the company. KCM, the country’s biggest private sector employer and also the biggest foreign investor in Africa’s largest copper producer, said earlier this month it planned to cut more than 1,500 jobs by March as it begins to mechanise its operations. The government responded by threatening to withdraw its licence for taking business decisions.

Reuters reports that on Monday, November 11, Moses Suwali, an interior ministry spokesman, said that the government had decided to revoke the visa of KCM chief executive Kishore Kumar for failing to attend meetings with government officials.

Reuters added that the KCM dispute is one of several tarnishing the image of Zambia as one of frontier Africa’s most promising investment destinations. The government last month threatened to shut Shoprite stores after the South African company fired 3,000 workers who went on strike over pay. Shoprite backed down.

President Sata was given political space after his election – after all, foreign investors and others had clamoured for transparency and an end to corruption and the new broom appeared to be bringing that about. But too much was personal, too much was pure spite. The recent developments – the threats to revoke licences, withdraw work permits and force foreign companies to retain staff they do not need or who break labour law – suggest the Sata regime has lost the plot completely. In this attempt to keep its populist promises (it was never going to be able to keep them), the PF runs the serious risk of throwing out the baby, the bathwater, and the bath as well as the bathroom and that is not going to win any votes.

Why do we care?

Zambia was one of the bright prospects for investment and African business under previous administrations even though its copybook was blotted. Corruption, nepotism and political sideshows were frequent, but the economy and the business environment were left to grow and develop, and foreign business was encouraged. Despite his less than statesmanlike entrance, President Sata was allowed his whims since they appeared to coincide with the tenets of good governance even if they were tinged with personal vindictiveness. The latest developments are something else; they suggest a regime floundering under a rising tide of populist promises and a failure to deliver to date as the global economy continues to hurt. We downgraded our political risk rating because Zambia’s investment environment can no longer be trusted: new ventures need careful examination and expansion plans are best mothballed for the short term. The Sata regime cannot continue with this suicide plan, it either stops and some semblance of sanity returns, or the economy suffers significant damage. The political risk downgrade does not currently constitute a sovereign credit risk downgrade, although we will downgrade the overall credit rating outlook from ‘stable’ to ‘negative’ in our upcoming December report if the government does not take steps to rectify the deterioration in the fiscal account, debt metrics and external buffers. At present, we rate Zambia’s overall sovereign credit risk as “B+” with a stable outlook.

Analyst: Gary van

NKC Independent Economists is a privately owned political and economic research unit located in Paarl, Western Cape, with a focus on the African continent. Founded in 2002, NKC scans the political and macroeconomic environment of 30 African countries and is able to measure sovereign risk in detail

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