As western investor sentiment declines, Zambia looks east to China.
• Xi Jinping happy with China-Zambia co-operation • Zambia in economic and technical support MOUs • Lungu courts chief executives of 15 Chinese corporations
With waning confidence in Africa’s second largest copper producer following high risk of debt distress classification and no IMF bailout package, Zambia has looked to China for increased trade and investment co-operation. Using as credit default spreads on Eurobonds to proxy investor sentiment, dollar asset valuation for the copper producer are at their lowest with bonds maturing in 2022, 2024 and 2027, yielding record highs of between 14.33% - 15.57% (compared to 5.25% - 8.975% issuance levels). Zambian dollar assets are the worst performers after Mozambique’s 2023 bonds paying 17.25%. The strong dollar environment as a result of trade wars between the two largest global economies have caused an emerging market (EM) asset sell-off, which Zambia has not been spared from. August has been the worst month for EMs with currency routs as an autopsy of weak commodity prices caused by dumping of risky assets by investors.
Zambia’s case is unique as the EM contagion just compounds the already existing sentiment around escalated debt levels reported at US$9.37billion and a delayed IMF US$1.3billion bailout package. Volatility in copper prices to near one month lows worsened growth prospects for the Southern African nation. Copper is said to be the only metal with a PHD and is used as a barometer for economic pulse. The IMF in the last week of August recalled its resident representative for Zambia, Professor Alfredo Baldini, to be deployed elsewhere. This added pressure on dollar bond yields which widened over 450bps as confidence waned further.
The kwacha money markets have trended bearishly with yields rising to 2 year highs. One-year money will now pay 20.5001% as other tenors remain fairly elevated between 14.5% and 18.5%. Annual inflation for the month of August breached the Bank of Zambia target band of 6-8% at 8.1%. Kwacha demand has dwindled as market players prefer the USD as a safer haven currency. This has resulted in kwacha depreciation.
What China has to offer
Zambia took advantage of the Forum for China Africa Co-operation (FOCAC) trip by arranging bilateral talks with its Chinese counterparts ahead of the forum. The Zambian delegation led by President Edgar Lungu met with his Chinese counterpart President Xi Jinping in Beijing on September 1. President Jinping expressed happiness at the China-Zambia co-operation and appreciated the bilateral partnerships the two nations share.
Vigorously seeking investment
President Lungu met with chief executives of 15 top corporations in China who presented business and investment proposals expressing interest in Zambia. These expressed appetite for investment in mining, agriculture, construction, manufacturing of electronic gadgets and biotech. The President implored the investors on his desire to export processed products through a value add mechanism that would allow maximization of return as opposed to raw materials. This meeting was chaired by the chairman for the National People’s congress Li Zhanshu.
Jinping pledged RMB200million (US$30million) grant for the electrification of the Lusaka South Multi Facility Economic Zone (LSMFEZ) and modernization of the conversion of the Mulungushi International Conference Centre to a convention center in readiness for the African Union Heads of State Summit to be held in Lusaka in 2022.
Four MOUs were signed with respective ministers signing on behalf of the Presidents. These include MOUs on economic and technical cooperation, protocols for export of Zambian products and grants for energy generation. Zambian honey from Mwinilunga will now have a market in China, the world’s second largest global economy.
Also witnessed was the twinning of Jiangxi Province with Zambia’s Muchinga Province.
Zambia will court its Chinese counterparts to discuss debt restructure possibilities. 30% of the copper producer’s external debt comprises bilateral debt with China. The renegotiation of debt is part of the asset liability exercise that the Ministry of Finance is carrying out in addition to the redemption strategy for its soon maturing dollar bonds. Zambia currently grapples with an external debt of US$9.37billion and domestic debt stock of the kwacha equivalent of US$5.3billion in addition to domestic arrears of the kwacha equivalent of US$1.37billion.
Zambia President Edgar Lungu with his Chinese counterpart Xi Jinping in Beijing
Credit default spreads on Zambian dollar bonds as a proxy for investor sentiment. Sentiment has declined sharply over the last two months.
Zambian delegation left and Chinese delegation right in Beijing ahead of the Forum For China Africa Cooperation