Investors Bet Vote Dispute Won’t Derail Zambia’s IMF Bailout

  • Groundwork for aid laid by re-elected Lungu: Standard Bank
  • Zambia agrees to cut fuel subsidies, reduce budget deficit

Investors are betting disputed elections in Zambia won’t derail the government’s plans to secure an International Monetary Fund bailout that could exceed $1.2 billion and is needed to top up foreign reserves.

The Finance Ministry announced in April that it hoped to finalize an IMF aid program for Africa’s second-biggest copper producer by the end of the year. Preliminary talks were put on hold until after Aug. 11 elections, which President Edgar Lungu, 59, the leader of the ruling Patriotic Front, won with 50.4 percent of the vote. The main opposition United Party for National Development says the results were rigged and plans to challenge them in the Constitutional Court.

“With the PF win, most of the groundwork has already been laid,” Samantha Singh, an analyst at Standard Bank Group Ltd., said in an Aug. 15 note. “We thus believe that an IMF deal could be sealed as early as the fourth quarter of 2016.”

Yields on the country’s $1 billion of Eurobonds maturing in April 2024 dropped 27 basis points to a year low of 9.19 percent on Tuesday, the day after the results were announced. Zambian dollar bonds have returned 28 percent this year, the most out of 17 African nations tracked by Bloomberg indexes. The average return for sub-Saharan African dollar debt was 16 percent. The kwacha weakened 1.2 percent to 10.07 per dollar by 8 a.m. in Lusaka on Wednesday.

“We think Zambia presents an interesting opportunity,” Citigroup Inc. said in e-mailed comments. “We believe election results do not alter much the final outcome of an IMF package. A Lungu victory probably means an accelerated path towards a deal.”

Capital inflows to Zambia have been hit by a slump in the price of copper, which accounts for more than 70 percent of export earnings. Gross international reserves dipped to $2.55 billion in April from $3 billion at the end of last year, according to the central bank.

The government would cut fuel and agricultural subsidies and reduce its budget deficit to secure IMF support, but won’t agree to job cuts or measures that push up health-care costs, Amos Chanda, Lungu’s spokesman and adviser, said in an Aug. 11 interview. The IMF may provide a loan of $1.2 billion dollars or more, he said.

Observers had mixed opinions about the election. While local civil-rights and church groups said pre-election violence, the ruling party’s abuse of state resources and bias by state media compromised its credibility, teams from the African Union and the Southern African Development Community praised how it was run. An EU observer team said media reports of violence had been overstated and the vote went well, yet its requests to access the results verification center had been denied.

Rigged Election

Forms allowing the results to be verified were withheld, ballot boxes were tampered with, tallies were altered and opposition officials were intimidated, UPND leader Hakainde Hichilema said in an e-mailed statement on Tuesday. The PF and Electoral Commission of Zambia denied that there was any attempt to rig the election.

Hichilema’s supporters in the Southern Province took to the streets to protest Lungu’s victory, with police reporting riots in at least five towns and 151 arrests. The situation has been brought under control and patrols have been intensified in the province, police spokesman Rae Hamoonga said in an e-mailed statement.

A prolonged political stalemate may undermine efforts to revive the economy, which last year expanded at its slowest pace since 1998, according to Mark Bohlund, an Africa economist with Bloomberg Intelligence in London.

Shrugged Off

“Lingering doubts about fiscal policy might act as a drag on investment, even amid pledges to cut back on spending and seal a loan agreement with the IMF,” he said in a report on Tuesday. “That’s especially true given that the PF, which has come out on top, sharply expanded borrowing during its first term in office.”

While the political upheaval could disrupt business activity in Zambia, it’s unlikely to weigh on financial markets, according to Neville Mandimika, an analyst at Rand Merchant Bank in Johannesburg.

“We do not anticipate a currency blowout despite the prospects” of more violent protests, Mandimika said in a report on Tuesday. The Eurobonds shrugged off the news about the pre-election violence and “this trend is likely to continue through this period of election-results uncertainty,” he said.