- Lower copper output exacerbates concerns about slowing growth
- Investors to focus on whether IMF advice on wages is followed
Zambian Finance Minister Alexander Chikwanda is seeking to restore confidence in the economy to help reverse the world’s worst currency performance, record borrowing costs and sliding growth. The two things that matter the most to the outlook are the copper price and power supply, which he has little control over.
Chikwanda will present a budget on Friday that will give investors clues on how authorities plan to keep spending in check in the face of plunging copper revenue and the most severe power shortages on record. The government started the year with an estimate for the fiscal shortfall of 4.6 percent of gross domestic product, gradually raising that to 6.9 percent. Barclays Plc is projecting a deficit of 8.4 percent.
“What will hurt fiscal consolidation is the growth impact of electricity shortages,” Raza Agha, an economist at VTB Capital Plc in London, said in a note to clients. “Coupled with a contraction in the mining sector from lower copper production and international prices, power shortages have exacerbated investor concerns around headline growth.”
After expanding an average of 7 percent annually over the past five years, the International Monetary Fund has cut its growth forecast for Zambia to 4.3 percent this year from 5.6 percent. The kwacha has dropped 46 percent against the dollar this year, the most of 155 currencies tracked by Bloomberg. It weakened 0.1 percent to 11.865 against the dollar as of 6:52 a.m. in Lusaka, the capital.
A 22 percent plunge in copper prices in the past year has prompted Glencore Plc to suspend operations in Zambia and the Democratic Republic of Congo, Africa’s biggest producers of the metal. Glencore owns more than 70 percent of Mopani Copper Mines, Zambia’s biggest employer after the government. The company is in talks with the government and labor unions about cutting 3,800 of the 20,000 jobs at Mopani.
An electricity crisis is compounding Zambia’s problems. Water levels at Lake Kariba are less than 30 percent, reducing output from hydropower plants that supply most of Zambia’s electricity.
Moody’s Investors Service cut the nation’s credit rating on Sept. 25 to B2, five steps below investment grade, concerned that fiscal deficits will remain high at 5 percent to 7 percent in the next several years, adding to the government’s debt burden. Zambia’s debt-to-GDP ratio surged to more than 41 percent in 2015 from 20 percent in 2011, Moody’s said.
Investors will be looking closely at whether the government proceeds with plans to raise workers’ wages in the budget, opposing the advice of the IMF, said Clare Allenson, an analyst at risk adviser Eurasia Group in London. Election-related spending may also add to pressure on the budget, she said.
“Unbudgeted expenditures on agriculture, fuel and emergency power will increase in 2016 while revenue will come under pressure due to the widening power crisis,” she said in a note to clients.