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AfricaNovember 6 2006

Strong mandate fuels efforts for credit rating

With the election passed, and the incumbent President Levy Mwanawasa re-elected, Zambia eyes a possible international bond debut. James Eedes reports.
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Another chapter has been written in the extraordinary recent history of Zambia, the formerly little-known southern African country that happens to be the world’s fourth largest producer of copper. Late in September, incumbent President Levy Mwanawasa saw off main challenger Michael Sata to win the country’s fourth democratic election, defying opinion polls that had tipped Mr Sata to win.

Mr Mwanawasa, of the ruling Movement for Multiparty Democracy (MMD) party, secured his second and final term in office after receiving 43% of the vote, compared with Mr Sata’s 29%. The results give Mr Mwanawasa an even stronger mandate to the one he received following his 2001 election victory.

Zambia has shot to prominence in recent years on the back of soaring commodity prices and substantial debt relief, which have brought a sharp improvement in the fortunes of this small land-locked country. With the local currency, the kwacha, appreciating strongly on the back of booming exports, the economy has more than doubled in size in dollar terms in just two years to about $12bn.

Factors of fortune

Two main developments account for this. The first has been Highly Indebted Poor Countries (HIPC) debt relief, under which external debt shrank from $7.1bn to just $500m, with debt servicing costs dropping. As a consequence, domestic government borrowing has fallen, directing liquidity towards the real economy. And, with the country’s credit profile and inflation outlook improved, foreign portfolio capital has poured in.

The second development has been the surge in copper prices, attracting investment into the country’s copper mines and more than doubling export earnings, equivalent to one-third of national income. The major player has been China, whose demand for copper is supporting prices and which has been a big investor in Zambia. Indeed, China was a hot election topic: the populist Mr Sata threatened to cut ties amid allegations of exploitative labour practices. In an uncharacteristic intervention, China retaliated by warning that it would exit the country in which it has invested more than $300m if Mr Sata won.

That said, not only the mining sector has benefited. The construction and telecoms sectors are both growing briskly, and investors are keenly eyeing the tourism and power sectors.

Desire for rating

With the election out of the way, the favourable set of circumstances that the country is enjoying is not lost on Zambian authorities, which can now pursue their plans for a credit rating.

“The country is now ready for a rating,” Bank of Zambia governor Caleb Fundanga told The Banker. “We have reached HIPC completion and we have seen some very positive developments in the economy.

“The next stage is to go to market with a debt issue. This would not be for government fundraising but rather to assist the private sector by providing benchmark pricing.”

According to Mr Fundanga, Zambian authorities are already in talks with the rating agencies and investment banks. “We are receiving good advice at this stage,” he says. Actual issuance notwithstanding, the governor knows that Zambia’s ratings outlook is positive and a good rating would only improve the country’s international standing.

“The rating process is similar to an IMF Article IV consultation, only the market has greater confidence in what comes from the rating agencies because this reflects their interests more closely. A rating would improve our credibility,” adds Mr Fundanga.

The outcome of the election not only lifts short-term political risk concerns, but also promises policy continuity – policy that has been broadly applauded by external stakeholders. In the immediate aftermath of the vote, the kwacha rallied, signalling positive investor sentiment. Although Mr Sata issued muted allegations of electoral fraud, foreign observers declared the elections free and fair.

Poverty problem

At his inauguration, Mr Mwanawasa promised to redouble efforts to tackle widespread poverty, focusing on job creation and schemes to empower the unemployed and the poor. Two-thirds of Zambians live on less than a dollar a day and, despite the unmistakable improvement in the economic numbers, in reality economic development has yet to filter down to most ordinary Zambians. Voting patterns in urban areas and the copper-mining region – backing challengers to Mr Mwanawasa – reflect deep dissatisfaction.

Zambia is not alone in grappling with these challenges. However, with the outlook for commodity prices stable to optimistic and the president’s mandate renewed, the country has its best chance of achieving broad-based, sustainable development.

Mr Fundanga points out that Zambia should not be viewed as a “mono economy” that is overly dependent on mining. Already the country exports cut flowers and vegetables to Europe, and Mr Fundanga believes that there is further potential in the agricultural sector as irrigation schemes are extended. Presently, between 100,000 hectares and 150,000 hectares of land is irrigated; the government plans to spend $150m over the next five years to double this area as part of its National Development Plan. Another measure is to create ‘farm blocks’, demarcated land for which the government provides infrastructure for commercial farming, including power and roads. The objective is to attract the private sector into agriculture; the spin-off is job creation in impoverished rural areas.

The country possesses 35% of the subcontinent’s water resources and a number of hydropower projects are being considered. Electricity exports to east Africa are a compelling opportunity, given power shortages across the region.

Further development of the tourism sector is also under way. More than 650,000 foreigners travelled to Zambia last year, a rise of nearly half a million since 2000. The country, which is located on one side of the world-famous Victoria Falls, has benefited from the economic implosion across the border in Zimbabwe. Leisure company The Legacy Group plans to invest more than $200m in the area.

Some fear that Zambia is already suffering ‘Dutch disease’ (in which surging exports of one item pushes up the exchange rate to hurt exports of other goods). “In reality, some will be happy with the direction of the currency and others will be not,” says Mr Fundanga. “A stronger kwacha cushioned Zambia from high oil prices and others benefited from lower imported prices.”

Competition boost

The governor would prefer productivity improvements to boost competitiveness rather than targeting a specific level for the currency. His primary concern is to smooth out volatility. Since mid-year, the kwacha has softened, reflecting a global reversal in sentiment towards emerging markets. The combination of debt relief, prudent fiscal policy and inflation slowing to single digits for the first time in decades has lured foreign portfolio inflows, attracted by yields on short-term government securities that were exceeding 30%. Stiff demand pushed yields as low as 6%, prompting worries that Zambia was vulnerable to a sudden flight of this “hot money” if sentiment changed. In the event, there was a modest outflow at the time of May’s emerging market-wide loss of confidence, but Zambia has emerged mostly unscathed.

“We would have had more problems with a fixed exchange rate than a free-floating one. We are teaching people how to live with the market, and are looking at various hedging instruments to minimise the risks to businesses.

“Since 2000, growth of non-traditional exports has been 15% per year consistently. We believe this can be maintained for the next 10 years. Not even the Asian Tiger economies managed this,” says Mr Fundanga. “We need India and China to continue growing – it will be like riding on the back of a Tiger but it will be a good ride.”

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