Report: Zambia’s Economy Weathering the Storm

Maize farm

There has been some improvement in Zambia’s macroeconomic conditions this year. As the impact of successive supply-side shocks has receded, monetary conditions have loosened further and external conditions have improved.

This is according to ICAEW’s (the Institute of Chartered Accountants in England and Wales) latest report.

“Economic weaknesses include lower agricultural output projections, the absence of a formal agreement with the IMF and some underlying structural fragilities. Among the most important of those, especially as Africa-watchers increasingly discuss debt levels as a danger to the continent’s economic health, is Zambia’s track record of weak fiscal discipline since 2013: underperformance of domestic revenues, delays in implementation of restorative measures, and vulnerability to budgetary overruns that are ascribed to unforeseen expenses”,  it added.

The continued that domestic revenue capacity remains constrained, at around 18% of GDP. This implies that expenditure cuts are needed for fiscal consolidation, which looks irreconcilable with the policies and programmes of President Edgar Lungu and his Patriotic Front (PF) government.

“At the moment, a robust global appetite for risk assets – especially sovereign debt – has fostered some complacency in markets. But many countries remain at elevated risk of debt distress, and a number of them are in Southern Africa, where governments have implemented patchy structural adjustments and borrowed indiscriminately”.

Their commitment to reform agendas is in question while political incentives promote populist policies. The rise of protectionism may dampen appetite for frontier market debt, especially in countries exposed to international commodity prices, such as Zambia via the risk-sensitive copper price, report titled-‘ Economic Insight: Africa report’ stated.

“In Zambia there already seems to be some misalignment between country risk and borrowing costs, especially considering the opacity surrounding the depth of its indebtedness – as with Angola and Mozambique, it has long been speculated that Zambia has been borrowing off balance sheet. This introduces considerable scope for excessive volatility”.

The sustainability of Zambia’s debt depends on growth, suggesting that the fledgling recovery that started last year on the back of improving external conditions, more favourable weather and the unwinding of tight monetary policy will support a decline in the real debt burden over the medium term, the report said.

However, owing to more recent adverse weather conditions and a pest outbreak, harvest projections now warn of a decline of 34% y-o-y in maize output over the 2018/19 season.

The resulting lower growth and pressure on the kwacha will inflate the real debt burden this year – we project that public debt will again breach the 60% of GDP threshold.

On the other hand, while Zambian growth momentum will be carried over to 2018, Oxford Economics has revised its projection for this year lower to 4.1% from a previous forecast of 4.4% (which is still an improvement from an estimated expansion of around 3.7% in 2017).

Cross-asset default risk came into focus this semester as outstanding debt payments (the compensation paid for the Libyan stake in Zamtel nationalised in 2012) captured headlines.

Even inclusive of domestic arrears, the sovereign balance sheet is dollar-heavy which presents asymmetric downside risks to adverse currency movements – the depreciation of the kwacha exchange rate will increase the debt level in local currency terms (and government raises taxes in kwacha), raising the risk of sovereign credit downgrades. The latter will present a negative feedback loop.

Mindful of this structural vulnerability, authorities plan to re-profile public debt towards long-dated domestic debt. However, challenges are presented by the narrow capital base, and the domestic debt curve remains front-loaded, meaning most of the debt is short-term.

This means the government is vulnerable to roll-over risk (banks choosing to cash out their bonds rather than keep lending) and interest rate risk (an increase in the rate the market demands to hold bonds).

African Eye Report

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