2015 started off with a bang – a tightly contested and peaceful presidential by-election coupled with the economic stimulus of a reduction in fuel pump prices. One can be forgiven for thinking things could only get better from there. Unfortunately, that was not the case.
Here is a recap of some of the factors that shocked the Zambian economy and their subsequent effects:
Copper, the country’s main foreign exchange earner (accounts for 70% of earnings), saw its price drop by 25% to end the year at about $4,701 per MT as a result of a slowdown in Chinese demand:
For Zambia, the consequences were all too apparent -- best summed up by Glencore’s decision to take 300,000 MT of copper off global supply by suspending operations at subsidiaries Mopani Copper Mines in Zambia and Katanga in neighbouring DRC for 18 months. This was done in a bid to spur a copper price rebound and ultimately keep shareholders happy. Subsequently, Mopani laid-off 4,300 workers and Katanga planned to cut about 20% of its workforce.
The Kwacha had been on the decline against the US dollar and other major currencies over the last 3 years but the pace of last year’s depreciation was especially ferocious:
A variety of factors were cited for the decline – key of which was low supply of foreign exchange on the local market. Negative sentiment and effects of declining global copper prices, the 700MW electricity deficit, ‘Spoofing’ (see definition here) and widening fiscal deficit exacerbated the situation.
But the ‘silent assassin’ of the Kwacha has been an unintended effect of the multi-billion dollar road infrastructure drive the current Government embarked on. The majority of the lucrative road contracts went to foreign firms, who of course had to import capital equipment (and certain materials like Bitumen) as well as convert their earnings into foreign currency.
Zambia generates 94% of its electricity from hydro-power. Below normal rainfall in the southern region of the country (where the major hydro dams are located) saw water levels drop significantly. This led to a 29% reduction (700MW deficit) in energy output from the dam:
As a result, the country saw load-shedding of as much as 14 hours a day over the last 6 months of 2015 to date. This had a negative impact on households, businesses as well as the environment (increased usage of charcoal). State utility ZESCO was importing over 300MW to help mitigate the deficit -- mostly from Mozambique which seems to be the only country in the region with an energy surplus.
Reversal of the 2015 mining taxation, exchange losses from foreign debt servicing and fuel importation (and subsidizing), increased domestic funding costs and spending overruns on infrastructure projects have been key factors to the fiscal deficit which is estimated to hit 8% of GDP in 2015:
Some of the factors were external but others were self-inflicted – a convincing case can be made for both. But the lack of definitive and proactive action by the Government saw ratings agencies downgrade or revise their outlooks on the country’s sovereign ratings.
Bank of Zambia (BoZ) spent much of the time using its tool-box to fight a rapidly depreciating currency. At the November Monetary Policy Committee (MPC) meeting, they raised the policy rate to an all-time high of 15.5%:
Prior to the rate rise, they had increased the statutory reserve ratio by 400 basis points to 18% in April. All these actions put the squeeze on commercial bank lending toward the end of the year and moving forward. To try and counter this, BoZ removed caps on lending rates which had been in place since 2012.
As of November 2015, imports exceeded exports in every single month leading to a preliminary trade deficit of K12.5 billion ($1.1bn):
Imports were up 23% year-on-year (y/y) led by consumer goods (up 50%) and intermediate goods (up 44%). Exports declined by 3% y/y led by a 4% decline in metal exports.
After starting the year off in a downward trend due to a reduction in fuel pump prices, inflation rapidly increased over the last quarter of the year to hit 21.1% in December:
The majority goods sold all over the country are imported – from certain key farming/production inputs to clothing. Exchange losses and costs associated with running supplementary energy for prolonged periods were passed onto consumers which saw inflation rise significantly.
Lusaka Stock Exchange (LuSE)
The Lusaka Stock Exchange (LuSE) had a very optimistic start to the year with 2 potentially exciting Initial Public Offerings (Finance Bank and Ikulileni Investments) on the horizon. They both didn’t happen and the LuSE closed at 5,734.68, down 6.9% in 2015:
It was an especially poor year for foreign investors because they suffered significant exchange losses as a result of the Kwacha’s savage decline. And except for certain months in the first half of the year, volumes were generally very thin. The LuSE’s year was summed up by the weak results of the Government’s sell-down (at a discount!) of shares in ZCCM Investment Holdings (LuSE: ZCCM-IH).
It wasn’t all bad though -- there were some important policies and developments (silver linings) put in place which should have a very positive impact moving forward:
In many respects, the challenges of 2015 needed to happen! Zambia needs exponential growth to provide more opportunities for its youthful population and that cannot be achieved by remaining on ‘the path of least resistance’.
2016 could be just as tough but will definitely be more interesting -- especially with a general election (under different rules!) on the cards. Fingers crossed that ‘extreme load-shedding’ is further mitigated as 420MW from Itezhi Tezhi Hydro and Maamba Thermal goes fully online this year (in combination with other measures).
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. * * *