Zambia No Longer Leading Investment Destination In Africa Following Disputed Vote

Zambia No Longer Leading Investment Destination In Africa Following Disputed Vote

 

A few days ago Africa’s second largest copper producer, Zambia, voted for a new president. The election pitted the representative of the status quo against an opposition candidate, Hakainde Hichilema, who has contested five times in the past ten years. With electorates across the globe opting for outsiders over the political elite thus far in 2016, many thought this would be the year for Zambia as well. Indeed, as early results from various constituencies rolled in, Hichilema appeared to have taken a comfortable lead. However, on Monday night, current President Edgar Lungu allegedly pulled ahead in the count, and was shortly thereafter declared the election winner.

What makes this election important is that the country bases its entire economy on one commodity and as a result has suffered badly in recent years. In 2015 GDP growth was down to 5.2% from 7.1% in the previous year; however, interest rates are at an all-time high of 15.5%. Inflation in June 2016 was down ever so slightly from the month before but still at over 20%. A staggering 25% youth unemployment rate has created further anguish.

So, in the light of these statistics, this election was crucial to the direction the country will take. As theFinancial Times reported in an article titled, “Ailing economy dominates Zambian election,” the electorate had a choice between “a populist incumbent championing social programs and a business-minded opposition leader who has pledged to fix the economy.” Well to me that statement is an eye opener because a country that is in dire trouble cannot afford funding for new social programs. Alternatively, building and diversifying the economy should be of paramount importance.

Mr. Lungu, the incumbent, ran on the current government’s infrastructure projects and as the Financial Times puts it again, “huge public sector wage increases approved.” Can anyone say buying votes? Well I think you know which side I would come down on, and I had hoped the majority of Zambia’s electorate agreed. Unfortunately they voted in favor of freebies rather than their future, in an election that appears to be tainted. What a shame. The country, the seventh largest investment destination in Africa in 2015, needs to expand its economy, not handouts.

Copper prices have been trading recently in a very narrow range in spite of strong Chinese demand for the commodity. China is responsible for about 45% of all copper produced globally, and there are predictions that prices will rise steadily over the next year as demand increases. Though recently Goldman Sachs has been of the opposite opinion stating that as demand rises, copper from places like Zambia will hit the market creating an oversupply and thereby driving down the price. We shall see. But what it does show is that if nothing else, a bout of volatility may soon be on the horizon.

So is there money to be made? Well there is the old standby (COPX) which is up 47% YTD, but I would draw the investors’ attention to Teck Resources (TCK), which is up a staggering 317% YTD. What accounts for this dramatic rise in the price of the stock? It’s not copper as one would think, but steel making coal, which is beginning to see a positive turn around. Teck, as the number one producer in North America and second largest exporter of that commodity, would be well positioned to take advantage of an increase in growth in the developing world driven primarily by the low cost of oil.

However, Zambia’s economic future is now very much in doubt. With 60% of the population living below the poverty line and a slowing economy, a country hailed by many as having a stable democracy may have a hole to climb out of before it can once gain attract meaningful FDI.

Peter Kohli is the CEO of emerging market specialist DMS Funds.

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