Zambian President Michael Sata fired the governor of the central bank and its board, reversed a foreign takeover of a local lender and temporarily halted metal exports within two weeks of taking office. Investors in Africa’s biggest copper producer aren’t panicking.
The kwacha has strengthened 3.4 percent against the dollar since Sata, 74, was inaugurated on Sept. 23. It’s the best performing African currency over that period, indicating investors have faith in the economy’s future. The government said it will consult with investors before considering raising mining taxes after pledging to more fairly spread copper wealth in the election campaign.
“This is not a quasi Fidel Castro-loving revolutionary out to change things,” said John Stephenson, who helps manage $2.7 billion at First Asset Management Inc. in Toronto, including shares of mining companies Barrick Gold Corp. and First Quantum Minerals Ltd., which operate in Zambia. “I don’t think he is going to carry through with the more material changes, which is really to wall up the industry with all these windfall taxes,” he said in a phone interview on Oct. 7.
Changes so far have focused on combating what Sata says is corruption in the civil service, meeting a promise that helped him rally support and remove the Movement for Multiparty Democracy from power for the first time in two decades. While he also pledged to share copper income, a 17 percent decline in the metal’s price since the end of August may restrict how much the government can extract through higher taxes. Copper makes up about 80 percent of the southern African nation’s exports and a slump in profit may curb investment and economic growth.
“Lower copper prices strengthen the argument within the party for not going the windfall tax route,” Philippe de Pontet, an Africa analyst for Eurasia Group in Washington, said in a phone interview Oct. 6. “It’s not clear to me that one can extrapolate that investors that are generally in good standing, who are doing their business credibly, will be targets of a witchhunt.”
Companies such as Vedanta Resources Plc and Glencore International Plc, the world’s largest publicly traded commodities supplier, and Vale SA, may invest more than $6 billion in the country through 2013, according to Sophie Chung, an analyst at Wood Mackenzie’s metals research unit, Brook Hunt, in an interview in July.
First Quantum is “confident” its investment in Zambia is safe, Chief Executive Officer Philip Pascall said in an e-mailed statement on Oct. 13, after meeting with Sata.
“We are working closely with the government,” said Simon Buerk, a spokesman for Baar, Switzerland-based Glencore. Vedanta spokeswoman Fiona Crosswell declined to comment.
First Quantum’s stock has jumped 20 percent since Oct. 4 after plunging 35 percent in the week of last month’s election as a Sata victory became probable. Vedanta rebounded 23 percent since Oct. 5 after sliding 22 percent from Oct. 19 to Oct. 23.
While the government will seek to boost income from mining companies, it has promised to do so in consultation with investors and won’t hurt its main revenue-generating industry, according to ministers and ruling Patriotic Party officials.
“Whatever measures we will take as government, we shall make sure they do not resemble anything close to nationalization because we have gone down the nationalization path before, and it has not worked for us,” Mines Minister Wilbur Simuusa said by phone on Oct. 13.
Governments around the world are increasing the size of the stakes in mining projects and “if we can up our stake to about 35 percent it would be good,” Simuusa told reporters today in the capital, Lusaka. He also disbanded the mine licensing committee.
In the early 1970s Zambia’s government nationalized copper mines owned by Anglo American Plc. Production plunged over the next three decades because of underinvestment in the mines and most of the assets were sold back to the company in 2000 for $90 million. Anglo then ceded ownership when the copper price fell.
Sata acted quickly to remove officials linked with the former government in what he said is to curb corruption and shift policy to help the poor.
Central Bank Governor
Caleb Fundanga was fired as central bank governor on Sept. 29 to help ensure looser monetary policy, according to Leon Myburgh, sub-Saharan Africa strategist at Citigroup Inc. in Johannesburg. The heads of the revenue office, the anti-corruption agency, the food-security body, the power utility and national broadcaster were also fired, and Sata halted the purchase by South Africa’s FirstRand Ltd. of Finance Bank Zambia Ltd.
Sata stopped metal exports to put new rules in place before canceling the order two days later. All exports will be certified by the central bank once the regulations are written to ensure transparency, Sata said in a state of the nation speech on Oct. 14. He cut fuel prices on Oct. 7 and ordered millers to reduce food costs.
When a president makes comments and threats like Sata has, “the companies are going to say they can find other places without the regulation and political risk,” said Chris Melville, an Africa analyst at Menas Associates in London. “That makes it an inherently less-attractive investment destination.”
Companies may only be willing to pay more in taxes and royalties if it means their operations will be protected and their titles guaranteed, he said.
Standard & Poor’s said Zambia will likely keep luring investors.
The ratings service affirmed the country at B+, four levels below investment-grade and in line with Kenya and Nigeria, on Oct. 4. Economic prospects in Zambia, which delayed plans to sell a $500 million foreign bond because of the election, are promising, S&P said, even as it warned about possible higher taxes for mining companies.
While investment and copper production is climbing, Zambia remains among the 20 lowest-ranked nations of 169 on the United Nations Development Programme’s 2010 Human Development Index.
Sata beat President Rupiah Banda, 74, under whom the economy expanded more than 6 percent a year since he succeeded Levy Mwanawasa, who died in office in 2008. Copper production climbed to more than 700,000 metric tons from about 250,000 tons in 1999, drawing praise from the International Monetary Fund for opening up the economy to foreign investment.
Production to Double
Output of the metal will probably double to 1.5 million tons a year by 2015, according to government forecasts. The increase may make Zambia the fifth-largest producer by 2013, Chung said in July.
Sata moved quickly to reassure some investors about previous campaign slogans. His first meeting with a foreign official after being elected was with the Chinese ambassador in Lusaka after making threats before past elections to expel Chinese mine workers.
“We are very satisfied with our current bilateral relationship,” said Hiahan Zhao, first secretary at the embassy in Lusaka, in a telephone interview on Sept. 23. “We have full confidence in our future relationship.”