Zambia, the African nation known for its vast copper sector and being a major supplier to China, among other developing economies, has seen its economy shrink as a result of the fall in global commodities. Multiple downgrades by ratings agencies have not helped the sub-Saharan nation, which in 2015 was led to “prayer” by the country’s leadership in an attempt to salvage its currency.
Fast-forward to 2016 and aggressive central bank moves have pushed the kwacha, Zambia’s official currency, to the top of emerging market currencies on the move. To date, the kwacha stands as the best-performing emerging market currency this year. Divine intervention, perhaps. But market analysts point to unusually aggressive action by the central bank as the main driver behind the rise of this battered currency. The kwacha has appreciated nearly 15% year-to-date in 2016, but the annual average for this year (~11/USD) is still 27%+ weaker than last year’s average (8.65/USD). It would have been more had the currency not appreciated, analysts say– 22%– between early November and early December 2015, according to Raza Agha, London-based chief economist for Africa with VTB Capital.
First, the government explained the appreciation of the kwacha as being driven by a combination of policy measures, including subsidies, electricity tariffs and overall spending that has supported sentiments. There was also a 300bps hike in the policy rate in ending October last year. And, copper prices have risen to near 15% since mid-January. Another positive– a statement from Glencore in March that it would invest USD1.1 billion over a two-year period on the Mopani mine complex was also a positive for the country and the currency. All this, coupled with potential aid from the IMF has no question lifted sentiment, but they are not out of the water yet.
“FX reserves are likely to remain under pressure until an IMF program or other donor support becomes available. Global ratings agency Moody’s expects FX reserves to fall to USD2-2.3 billion by end 2016, from USD3 billion in end 2015,” Agha told Emerging Market Views in an interview. “Also, yes copper prices are higher since the start of the year, but they are still down 50% compared to peaks in early 2011. And compared to the average for 2015 (USD5493/MT), the 2016 YTD average (~USD4700/MT) is still 15% lower. So unless copper prices rise consistently hereon, they could average lower than last year, meaning for the year as a whole, the impact on the balance of payments/external sector as a whole will continue to be negative.”
Currently, all three ratings agencies are on negative outlook for Zambia, implying there could still be more downgrades. This could happen if there is evidence of higher spending in the lead-up to elections, or if FX reserves fall, Agha said. “Or, if the kwacha slumps again. And I havent even gotten to elections yet in August–political noise will rise, given how close the contest is likely to be”. The opposition, Agha explains, is already in full swing capitalizing on the economic challenges that emerged under the current government. These issues and more amidst the global backdrop will be negative factors, which will ultimately cloud Zambia’s outlook.
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