August 2, 2016
The Zambian kwacha was the third worst performing currency of 2015. There was a litany of causes for the depreciation of the kwacha in 2015, including: falling copper prices (see chart below), lower demand from China, fiscal concerns, energy shortages, and loose monetary policy. In the fourth quarter of 2015, the Bank of Zambia stepped up its sales of U.S. dollars (roughly 2% of GDP from September to December 2015) which helped curb the depreciation and stabilize the kwacha. However, markets have remained far from convinced that the structural issues in Zambia are close to being resolved, including namely the country's dependence on copper (70% of total exports), the dismal energy situation that led to mine closures in 2015, and fiscal uncertainty surrounding government spending prior to the upcoming general elections in August. As a result, the kwacha has been steadily depreciating since April, by about 20% over the past two months.
last macroeconomic forecast for Zambia was in October 2015. At that point, even though
the kwacha had yet to reach its weakest point, we expected policy to tighten
and to lead to an appreciation in the near-term. In November the Bank of Zambia (BoZ) raised interest rates by 300 bps (from 12.5% to 15.5% p.a.), but has been on
hold since then. As a result, the tightening by the BoZ thus far has been less
than we expected in October, which only increases the risk of faster depreciation
than we forecasted. In addition, the aforementioned structural issues lead us
to believe that further currency depreciation, albeit at a more gradual pace,
is still in store.
Real GDP is estimated to have grown by 3.6% in 2015, its lowest rate since
1998. We expect growth to improve only slowly, remaining below 5% in the next
several years. The combination of slower growth in China, the aforementioned
energy bottlenecks, and worries about the fiscal position will continue to
constrain investment. Additional monetary tightening necessary to stabilize the kwacha and reduce inflation will
be another impediment to growth, and this is on top of the extremely tight
liquidity position of the banks which has crippled lending. The lack of credit
growth combined with the twin fiscal and current account deficits pose risks to
growth. On the other hand, improvements in copper prices and energy supply will
Consumer price (CPI) inflation spiked in 2015Q4, reaching 20% YoY. Exchange rate pass-through
was clearly the main factor but it was exacerbated by weather induced food
supply shocks. Prices have stabilized in the last few months, most likely aided
by the April appreciation of the kwacha. However, inflation pressures should
continue to build as the kwacha resumes a gradually weakening trend and fiscal policy
loosens in the run up to the elections. In addition, the need to liberalize
electricity and fuel prices will contribute to inflation in the coming years.
The budget deficit for 2016 is expected to be largely unchanged from last
year’s 8.1% of GDP. Earlier the Finance Minister had announced some ambitious
consolidation plans amounting to less than 4% of GDP, but it appears likely that such target will be missed. The need for energy imports and the higher cost of
fuel subsidies contributed to a higher than planned deficit. After the
elections (and a potential deal with the IMF), fiscal consolidation should get
going, although interest payments on the debt (T-bill rates have hit 25%) will
hamper the consolidation efforts.
The current account deficit was estimated to be about 7% of GDP in
2015. The deficit should narrow this year as imports have fallen in early 2016 and copper prices have rebounded. However, FDI inflows have been
negatively affected by all of the aforementioned structural issues. FDI should
recover with copper prices and fiscal tightening, but the current account will
remain in deficit for the next several years. Although the announced investment by the mining giant Glencore is a positive sign, improvements in the energy grid are still badly
needed to help attract further investment.
The economist responsible for this story: Peter Elliott
This post is for informational purposes only, it is not intended as a solicitation or offer to enter into any transaction or business relationship, and should not be taken as advice or a recommendation to buy or sell any financial instruments or securities. OGResearch does not accept liability for any damage caused by reliance on the contents herein.