ZAMBIA’S VACCINE ROLLOUT, ON THE CUSP OF AN IMF DEAL AND FITCH UPGRADE
Despite the recent World Bank growth forecasts of 0.6% (2021) and 1.1% (2021) released at the virtual spring meetings, we remain optimistic of higher growth should a deal be concluded and efforts to restore fiscal fitness persist. The MinFin had projected a ‘V’ shaped recovery of 1.8% in the budget and the ERP which we remain confident that Zambia will still achieve.
THEweek beginning April, 11 was a landmark week for Zambia characterized by a hat-trick of positive news skewed towards clawing back confidence in the market which has been suppressed for a long time now.
Starting with a successful vaccine rollout program after the copper producer received 228,000 doses of AstraZeneca from India under the COVAX facility, hope for economic recovery has started to brighten though at a time that positivity rates have eased to lows of 2.9%.
The economy nonetheless remains fully opened yet private sector pulse still clogged with spiraling inflation, at input and selling price levels. Various senior health officials led by Minister Jonas Chanda had the first jab as a demonstration of leadership to allay fears around myths surrounding vaccines.
This coincided with completion an IMF Article IV virtual team session that just completed to discus Zambia’s Extended Credit Facility (ECF) application. This was the International Monetary Fund (IMFs) team third engagement in 2021 with the odds widening higher at every engagement as hope for deal closure strengthens optimism for the copper producer.
Bloomberg published an article entitled, IMF sees Zambia program deal possible before august elections dated April 15.
“I hope we can move forward by reaching agreements, and get broad endorsements of political leaders,” he said. “But that will depend on agreeing on the parameters of the program, and we are not just there yet,” IMF Director for Africa Aemro Abebe said.
It is vivid that a number of factors are at play for Zambia as it approaches the August 2021 polls. There are both ‘upside and downside’ political risk factors that remain eminent key of which include decisions as to whether or not and extended credit facility from the Washington based lender, IMF, will be nodded. Optimism is still on the cards, as to whether the deal prescriptions are adopted, will be a matter of a call by political leadership (cabinet) between now and May 14 (very tight timeline), which is exactly 3-months before parliament dissolves.
Is the IMF deal good for Zambia
To ally fears of those thinking it’s a loan that the copper producer will pay for the rest of its life, an ECF is the best prescription for Zambia in the immediate term. The package is not for debt service neither will it effectively solve our economic woes but the most tangible externality of bailout by the lender is investor confidence (to claw back) which has dwindled after the elevated fiscal fragilities to include the 3-coupon payment defaults on Eurobonds outstanding.
The fundamentals are clearly in favor of Zambia from a commodity price perspective i.e. copper on the London Metal Exchange (LME) is racing north of $9,125/MT supported by strong Chinese and US growth recovery amidst a greenfield driven electric car era and other infrastructure pushes globally.
This is all happening at a time the Zambian authorities are reorganizing their stake in key mines such as Konkola and Mopani, which ideally means Zambia is well positioned to tap into the $15,000/ MT ( Trafigura trading) copper forecast in the next decade, an opportunity to rebuild a sustainable sovereign wealth fund, claw back lost economic growth and sustainably shore up foreign exchange reserves.
Still endowed with adequate precipitation, food security is not a concern for Zambia because of back to back bumper harvests but the agriculture faculty still has structural issues that require correcting such as inability to locally manufacture fertilizer which is another key driver of dollar demand exacerbating currency pressure. Energy projects in the pipeline are well poised to absorb the excess demand and will curb power rationing.
To complement an IMF program, as the nation strides to restore fiscal fitness will require aggressive execution of the Economic Recovery Plan (ERP) especially to drive private sector led growth to help the nation improve its export earning capacity.
There is a very strong manufacturing opportunity call for Zambia that has been underestimated for years and it is high time the authorities become very deliberate about reorganizing production policies as well as financial institutions including the regulator the Bank of Zambia to address the cost of capital perpetual hurdles. Economic growth will only thrive if every player in the ecosystem deliberately contributes to driving this urgent cause.
When confidence creeps back into the economy, credit spreads on dollar bonds will narrow significantly to improve pricing which in-turn will help Zambia should it have refinancing options for its soon maturing Eurobonds. Zambia has a stock of dollar bonds totaling $3billion. When Zambia made the $750million debut that was 12x times oversubscribed pricing was circa 5.25% compared to the current blow out to 55%-59% on the asset maturing 2022 while the 2024 and 2027’s are paying between 22%-45% from 6.3975% - 8.75%.
The widened pricing reflects the defaults and other fiscal vulnerabilities the nation has been through. Being on the cusp of an IMF deal means pricing will normalize post (IMF deal) off-course after rating upgrades as confidence grows and so will demand for Zambian dollar denominated assets. With a program the copper producer will receive balance of payment support to help address the dollar scarcity and widened backlogs experienced.
This will help address the current clogged pipe lines that are slowing and weighing
growth. On average it is taking as long as 4-5 weeks for commercial banks to access lots as small as $2.5million which is very hurtful for growth prospects.
Fitch ‘CCC’ upgrade notch, reprieve for Zambia
Fitch rating agency upgraded Zambia’s local currency long term issuer rating to ‘CCC’ from ‘CC’ while reaffirming its foreign currency rating to ‘RD’. It is about a dry point of construction that a lot of work is being done on the local currency side through central bank bond buy-back programs and arrears dismantling.
The latter remains critical to unlocking liquidity to the sectors that have for years been starved in unpaid dues to the real sectors of the economy. As at yearend of 2020 domestic arrears stock was K26.5billion which is aggressively being trimmed to help absorb supplier, contractor and retiree related pressures especially post pandemic. The rating agency does acknowledge the efforts and as such relieved Zambia local currency rating to ‘CCC’.
Risks still remain high as the fiscals still remain fragile but the upgrade means a lot for the banking sector from a ‘risk weighted’ financial reporting standards (IFRS) in credit impairment management.
Most local operating international banks took significant provisions in 2020 to reflect the default rating as well as for carrying government securities. For those whose internal credit models were adjusted to reflect worst case scenarios, upgrade means they could be writing back
profitability in this period to improve their earning lines. However they say any jurisdiction is ‘ AAA’ rated for its own paper meaning local currency is least of their worries.
Foreign currency debt exposure is the biggest driver of credit rating which Zambia will have to work tirelessly around through securing a program which is clearly a precursor to successful external debt restructure which will in-turn get confidence back into the market. Transfer and convertibility risks remains very high as flagged by Fitch.
All things constant (ceteris paribus) the Fitch upgrade was a breath of fresh air and was one of the developments that earned Zambia a hat- trick of positivity last week. The economy should remain cautiously optimistic on the next steps. We remain keen on the other rating agencies such as Moody’s and Standards & Poor’s should they release their ratings especially with the copper producer on the cusp of an IMF deal.
Sustainable financing options, as capital markets go green
Much as ratings are very key to determining credit line access for the sovereign, Zambia’s capital markets are already gearing up for more sustainable financing options such as green bonds to help tap into unique pools in cognizance that with with default rating, accessing the eurobond markets may not be as easy for now.
The COVID year revealed other opportunities such as usage of technology to tap retail pools faster and embracing sustainability which advocates for eradication of climate change effects. A good credit rating improvement, as the one by Fitch, does to some extent help investors tap into any potential offerings that may come from Zambia.
Despite the recent World Bank growth forecasts of 0.6% (2021) and 1.1% (2021) released at the virtual spring meetings, we remain optimistic of higher growth should a deal be concluded and efforts to restore fiscal fitness persist. The MinFin had projected a ‘V’ shaped recovery of 1.8% in the budget and the ERP which we remain confident that Zambia will still achieve.
Mutisunge Zulu is a financial analyst, author, strategist and economist currently serving as the National Secretary of the Economics Association of Zambia (EAZ) and serves as Non-Financial Risk Head for one of Africa’s international banks.