One of the biggest consequences of the Government’s infrastructure investment drive since they came into power has been a significant rise in Treasury bill (T/bill) yields:
It was done in order to boost growth by making up for decades of under-investment in various infrastructure from road to electricity. This has also seen them raise both the domestic and foreign debt ceilings in order to help fill financing gaps caused by the many capital expenditure-heavy projects they have taken on.
This has created a lucrative investment opportunity for anyone looking to put their cash to work. Here’s why:
Stable political environment
The country once more demonstrated to the world that it has a stable political and democratic environment after the tightly contested January presidential elections which were won by the incumbent party (by 2 points).
Cheap global oil
The fall of global oil prices from a high of $110 per barrel to around $50 has led to local pump prices being reduced by at least 28% (though prices could go up this month). This has led to a drop in monthly inflation from 8.1 in November 2014 to 7.2% in March 2015:
Low or falling global fuel prices will continue to have a downward push on inflation in Zambia – especially if the Kwacha remains stable or appreciates against the US dollar. In addition, the central bank has demonstrated a tendency of taking aggressive action to curb inflation (or the threat of it).
Mining tax issues close to resolution
Mining companies (who generate over 70% of forex earnings from exports) have recently been at odds with the government over two pieces of tax legislation to do with Value Added Tax (VAT) refunds and changes in the mining tax regime as their industry faces lower copper prices. This has seen them significantly reduce forex inflows into Zambia which has resulted in low supply of US dollars which has put further pressure on the already-vulnerable currency:
The VAT refund issue was resolved in February while President Lungu set April 8 (yesterday) as the deadline for the Ministries of Finance and Energy/Mining to come up with a compromise on recent changes in the mining tax regime. A good compromise could have a positive impact on the Kwacha which should see some appreciation as well as more stability moving forward.
Civil service wages
Wages have recently been upped for the upper echelon of government (President and cabinet in 2012) and the rest of government (in 2013) which has seen them consuming over 50% of tax revenues. This does not leave a lot of room for investment in critical sectors like health, education as well as infrastructure (water/electricity/rail) which will keep driving the government back to tapping domestic and international debt.
The fortunes of the Zambian Kwacha are tied to those of global copper prices. The currency has seen a significant decline against the US dollar since 2013 and reached all time lows last month. This also has a secondary effect of putting upward pressure on inflation because the country has a high import bill. Currency risk will always play a major role as long as the economy continues to grow off of a low base and exports remain heavily geared to the red metal.
Government fiscal discipline
Even though public debt remains manageable at slightly over 30% of GDP, the latest IMF article IV consultation highlighted a number of other issues putting pressure on the government’s containment of the budget deficit. Many of them are self-inflicted like maize subsidies and sub-optimal pricing of fuel pump prices. They also have to repay VAT refunds which were withheld from various mining companies. Rating agencies Standard and Poor’s and Fitch re-affirmed their Zambia credit ratings with the latter revising its outlook to stable (from positive).
According to central bank data, there was K11.5 billion worth of T/bills outstanding as of February 20 this year broken down as follows:
Citibank Zambia are a shining example of how lucrative this sector can be – as of Q3 2014, they had earned K169 million ($22M) in interest income, 80% of which was from government T/bills and bonds. Their biggest asset is their portfolio of T/bills and bonds which was more than 3 times the size of their loan book at K1.5 billion as of Q3 2014.
The opportunity is there but each investor will have to ask themselves whether the risks (particularly currency risk because it also puts upward pressure on inflation) are outweighed by the rewards.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *