Previous Quarterly Editions
Expropriation Risk: 72 74 76 78 Political Violence Risk: 69 72 71 68 Terrorism Risk: 20 20 20 20 Exchange Transfer and Trade Sanction Risk: 68 70 72 70 Sovereign Default Risk: 86 86 87 88
TREND ▼ OUTLOOK ▲
The COVID-19 pandemic continues to dominate the political landscape, even though the country had officially recorded less than 2,000 cases by mid-July 2020. Opposition leaders and civil society groups have alleged that President Edgar Lungu is deliberately using restrictions ostensibly related to COVID-19 in order to strengthen his grip on power. These have included closing down radio stations that have refused to broadcast the government’s COVID-19 messages free of charge and the banning of opposition and civil society meetings on the basis of health concerns. The COVID-19 pandemic was also used as the pretext for ending the parliamentary session after the government failed to secure the two-thirds majority it needed to pass the controversial Constitution of Zambia (Amendment) Bill. The proposed legislation threatens to weaken key democratic institutions and would undermine the independence and effectiveness of both the legislature and the judiciary. In an attempt to outmanoeuvre the government and the police, a group of youths left urban areas to hold a protest against the bill in an unknown location in “the bush”. The livestream of this ingenious move was watched by over 90,000 people and was reported on around the world. President Lungu is likely to face growing protests as the economy continues to struggle. This year looks likely to see a contraction of at least 5%, the first that the country has experienced in over two decades. In late June 2020, the government announced a stimulus package worth 440 million USD to be funded largely by borrowing. Not only does this add to the country’s growing burden of debt, but there is also a significant risk that these funds will be used by the governing Patriotic Front (PF) to shore up the party’s softening support base, rather than to support economic transformation. The COVID-19 pandemic has thus reinvigorated longstanding calls to accept an IMF programme as a way out of the looming debt impasse, something various ex-ministers and economists urged Lungu to do in an open letter in April 2020. However, the Fund remains reluctant to agree to a programme, just as Lungu remains reluctant to commit to its inevitable stringent conditions before next year's elections in 2021. Meanwhile, Zambia’s external debt continues to increase despite already exceeding sustainable levels. Conservative official estimations show total external public debt was more than eleven billion USD at the end of 2019. By April 2020, the IMF was expecting the debt-to-GDP ratio to reach 92% in 2020, with the fiscal deficit at 9%; in May 2020, debt servicing costs were taking more than 40% of government revenue.
TREND ▲ OUTLOOK ▲
As the costs associated with COVID-19 continue to rise, the government will increase its pressure on foreign investors. As usual, the copper mining sector faces calls to contribute more to the economy. However, it is poorly placed to be able to respond as the collapse in economic activity triggered by the COVID-19 pandemic initially led to a further decline in copper prices. The government’s long-running dispute with Vedanta Resources, the Indian company which owns Konkola Copper Mines (KCM), is yet to be resolved. However, despite beginning proceedings to liquidate KCM in mid-2019, the government recently intervened to secure the company’s power supply by designating the electricity lines owned by Copperbelt Energy Corporation (CEC), which supply KCM as well as many other mines, as a “common carrier”. CEC had been due to disconnect Vedanta over 144 million USD in unpaid electricity bills, and by changing the designation of its power lines the Energy Minister effectively enabled ZESCO, the state power company, to continue the supply while using CEC’s infrastructure for 30% of what the company would normally charge. Ironically, while this marked a thawing of relations with Vedanta, it led to accusations from CEC that the government had effectively expropriated its infrastructure, bringing the company to the verge of bankruptcy. This episode is therefore unlikely to boost investor confidence.
The government continues to use COVID-19-related restrictions to manage dissent, which had been becoming obvious in the latter part of 2019 as the country’s main opposition party, the UPND, held huge rallies in previous PF strongholds such as the Copperbelt. However, the state of the economy, the controversy over President Lungu standing for a third term, and the government’s efforts to amend the constitution ahead of the August 2021 elections all increase the risk of political violence once the threat from the COVID-19 pandemic recedes. Zambia does not yet feature the kind of politicised militias that have scaled up local unrest into national level conflict in other countries and, despite the political importance of 2021’s elections, this is not something that appears likely in the medium or even the longer term.
TREND ► OUTLOOK ►
There are no terrorist organisations known to be operating in Zambia, and the country has not experienced a major terrorist incident. However, any serious deterioration in the country’s stability would reduce the ability of the security services to monitor external threats.
As part of the efforts to stimulate the economy during the COVID-19 crisis, the central bank reduced its benchmark interest rate by 225 basis points to 9.25% in May 2020. Having hit a recent low against the US dollar in April 2020, the kwacha has recovered slightly and stabilised in recent months but its recent severe depreciation has effectively increased the country’s debt burden, and interest payments, by nearly 30%. The price of copper, which is crucial to the economy, has rebounded from its sharp fall early in the pandemic but is yet to reach the levels seen at the start of 2020.
In the absence of debt cancellation, the short-term suspension of debt repayments offered by some lenders will not create the economic breathing space that the country needs. China has signalled a willingness to consider debt rescheduling and cancellation, indicating that it is prepared to write off some but not all government loans. However, the Chinese government had already cancelled some Zambian debt and rescheduled payments before the COVID-19 pandemic and may not be willing to do more for Lusaka. For their part, a group of lenders who hold around a third of the country’s Eurobonds, which are due to mature in 2021, have formed a committee to negotiate with the government. Given that the bonds are currently trading at around 54 cents on the US dollar, it is expected that investors stand to lose around half of the face value of their investments. This is likely to undermine the country’s ability to issue further Eurobonds in the future.
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