NKC African Economics says economic prospects are worsening in Zambia as fiscal and external pressure builds.
The Oxford Economic Company says combined with weakening mining sector sentiments and a fragile external position, fiscal strain will likely yield a gross domestic product (GDP) growth outturn of a meagre 2.6 per cent this year, “0.9 percentage points weaker than our previous projection for 2019.”
“High fuel costs, prohibitive commercial interest rates and exchange rate pass-through continue to constrain a recovery in private sector consumption, while the outlook has deteriorated substantially over the past quarter due to negative revisions in the harvest outlook, a weaker profit outlook as a new sales tax will come into effect by mid-year, and a higher-than-expected pace of currency erosion over April-May,” the Zambia Country Profile dated May 27, 2019 states.
“The foreign reserve buffer weakened further in the first quarter to expose rising external fragility. Failure to secure IMF financial assistance will pressure the copper producer to continue borrowing in foreign currency, unravelling fledgling consolidation efforts, as revenue flows are inadequate to meet external liabilities. Our revised forecast sees the external debt position at 77.5 per cent of GDP at end-2019 on account of new loan disbursements and further contraction of exporters’ and suppliers’ credit, as well as adverse kwacha movements. Weak revenue mobilisation implies that, absent of additional external debt contraction on commercial terms, the foreign reserve buffer will be run down further to meet external obligations to risk a balance of payments event. Consolidated with a weakening invisibles trade position, copper sector softness is expected to steer the current account deficit to 6.7 per cent of GDP this year.”
The report states that weak policy reform, unstable debt metrics and external vulnerabilities undermine fragile growth recovery.
It states that public external debt servicing costs jumped by nearly 50 per cent to US$760 million in 2018 and are forecast to rise by an additional 24.4 per cent this year.
“We anticipate that the domestic capital base will narrow further, with maturities outstripping new supply to yield a larger shortfall to tenor targets. This view implies a rotation into higher-cost commercial external debt to meet the funding requirement,” the report states. The NKC states that monetary policy tightening was on the cards as cost-push inflation threaten to unhinge inflation expectations.
“The deteriorated inflation outlook and the decision to lift the benchmark interest rate signal monetary authorities’ concern that the de facto tightening of financial conditions witnessed since the first quarter will be inadequate to anchor inflation expectations within the target range,” it notes.
On peer comparison, Zambia compares unfavourably when looking at the copper producer’s performance on numerous macroeconomic indicators and comparing it to the median performance of some other high-debt Eurobond issuers, as well as when compared to the African median performance.
“Zambia underperforms relative to both peer groupings on all the metrics under consideration: economic growth, government finances, inflation, external liquidity and foreign investment,” it states. “One of Zambia’s weakest comparison metrics relates to inflation, with the copper producer expected to record an average of 8.9 per cent per annum. Over the 2018-20 period compared with the high-debt Eurobond issuer median of 5.7 per cent per annum and the African median of 5.0 per cent per annum. Another notable underperformance relates to foreign exchange reserves, with Zambia expected to maintain a level of forex holdings to cover an average of only 1.9 months of imports over the forecast period compared with an African median of 4.5 months.
Meanwhile, NKC states that Zambia substantially underperforms relative to both the high-debt Eurobond issuer median as well as the African median in terms of government finances.
“At an average deficit of 7.1 per cent of GDP over 2018-20, Zambia’s fiscal position is considerably worse than the shortfall of 4.3 per cent of GDP posted by the African median and a deficit of 4.2 per cent of GDP by the median of the high-debt Eurobond issuers,” states the report.