China or Turkey will win bid for KCM, predicts EIU

PRESIDENT Edgar Lungu and the PF have belatedly come to realise that their high-risk development strategy, which involves a rapid scaling-up of infrastructure spending fuelled by Chinese loans is unsustainable, reports the Economist Intelligence Unit.

And the EIU has forecast that either China Non-Ferrous Metals Company or Cengiz of Turkey will win the bid for Konkola Copper Mines assets.

In its latest country report for Zambia, the EIU notes that the IMF has warned that unless there is a slowdown in new borrowing, debt management will become difficult.

“… developments in 2019 indicate this message is finally being heard (the Zambian government announced a delay in the acceptance of 25 new foreign loans worth US$2.6bn intended for infrastructure development in May 2019),” the report states.

“However, it is probably too late for Zambia’s government to change course politically, with the PF and Mr Lungu having staked their re-election in 2021 on delivering a series of infrastructure projects to voters.”

The EIU notes that with general elections due in less than two years, it will be politically difficult (at home and internationally) for the PF government to cancel expensive projects already in the pipeline.

“Instead we expect them to seek ways of satisfying their creditors (principally China) without triggering a credit crunch (prior to 2021 at least). This has caused a scramble within Zambia to identify assets that can be used to pay off the country’s debts without triggering a violent nationalist reaction against China’s growing presence in the country’s economy,” the EIU states.

The EIU stated that it believed that it’s President Lungu and his government’s need to service Zambia’s bilateral debts to China (without making major diplomatic or policy changes) that lie behind the President’s hard line towards critics of his government’s fiscal policies towards the mining sector.

“In particular, Zambia’s liquidation of Konkola Copper Mines (KCM), a major copper producer, although it has worried investors, has played well with nationalist voters (who want the country to get a bigger share of mineral profits) and given the PF and Mr Lungu a valuable bargaining chip,” the report states.

The report noted that acquiring KCM’s assets had already sparked interest from China Non-Ferrous Metals Company (CNMC), noting that Zambian authorities had stated that nine companies from Australia, Canada, China, Russia, and Turkey had expressed an interest in bidding for KCM’s assets.

“However, we forecast that the winner will be either CNMC (in the expectation that China will offer concessions to Zambia over its bilateral debt in exchange) or a Turkish company, Cengiz,” the report states.

“Turkey has previously expressed interest in refinancing Zambia’s US$750m Eurobond (falling due in 2022), and its financial situation has improved sufficiently that KCM’s assets may tempt it into making a second offer if Cengiz wins the bidding for KCM. A crash in the value of the Turkish lira over in mid-2018 had diminished the feasibility of this. However, financing conditions for emerging markets have since improved and Turkey’s government is in a much better position to renew its offer to Zambia now.”

The EIU states that either outcome would offer the PF and President Lungu a way to pay off some of the foreign debt Zambia has accrued without upsetting China by cancelling infrastructure projects Zambia has already agreed to.

“It also gives more time for austerity measures to come into effect without submitting to financial oversight from the IMF. Although there is a risk that this path will cause investment in the copper mining sector to collapse (if investors become convinced that the government is going to take over their companies’ assets), copper prices are forecast to rise to 357 US cents/lb [per pound] by 2023,” states the report.

“With such huge potential profits, Mr Lungu’s gamble that he can take a hard line with the mining sector without causing it to crash may yet pay off.”

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