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Expropriation Risk: 63 63 63 64 Political Violence Risk: 48 48 48 49 Terrorism Risk: 20 20 20 20 Exchange Transfer and Trade Sanction Risk: 64 64 64 64 Sovereign Default Risk: 83 83 83 83
Risk Temperature
TREND ►
Zambia became the first African country to default on debt since the start of the COVID-19 pandemic, when it failed to make a payment of USD42.5mn on a USD750mn Eurobond in November. The country also missed a second payment of USD56.1mn in January. It is now believed that Zambia owes over USD12bn, around half of which is owed to private creditors. Major lenders have said that any agreement over a debt reduction or rescheduling plan can only happen after Zambia has agreed an economic rescue package with the International Monetary Fund (IMF). However, the Zambian government and the IMF have failed to reach agreement on a proposed USD1.2bn bailout package for well over a year, and major sticking points remain.
Most obviously, President Edgar Lungu is reluctant to agree to a significant reduction in public expenditure (which would be unpopular domestically) ahead of the August 2021 general election, which is expected to be extremely close. The IMF is also understood to want greater transparency with regards to the country’s debt burden and agreements with China. At present, Zambia is believed to owe around USD3bn to Chinese state-owned or private lenders, more than a quarter of its total debt commitment.
The likely delay in any formal agreement until after August means that the economy will continue to suffer from considerable uncertainty, and the debt crisis will continue to undermine the government’s ability to respond effectively in other areas. For example, despite the threat posed by the COVID-19 pandemic, the proportion of the budget dedicated to healthcare fell, while debt payments increased. Similarly, unemployment as a share of the labour force grew from 7.9% to 12.2% between 2012 and 2020.
An extremely difficult economic context has been exacerbated by COVID-19 and a loss of tourist revenues. Gross domestic product contracted by 1.2% in 2020 and the country may fail to achieve the World Bank’s modest projection of 1.8% growth in 2021 given the new COVID-19 strains spreading in southern Africa, which have led the country to be placed on the UK government’s COVID-19 travel ‘red’ list.
Inflation also remains a source of concern (and a potential driver of political unrest) having averaged 15.7% in 2020 and hit a recent high of 22.2% in February 2021. Political controversy around the August general election is likely to drive an increase in unrest and instability, which may further deter foreign direct investment, exacerbating the country’s economic difficulties.
Reports in early May that a lack of capital had halted production at Konkola Deep due to the conflict between the government and Vedanta -- which had previously run Konkola Copper Mines before the Zambian government attempted to force it into liquidation, an issue that is still stuck in the courts -- mean that the country will not fully benefit from rising copper prices, which recently surged past USD10,000 a tonne.
The government has a history of increasing the pressure on foreign investors as economic conditions have deteriorated. This pattern continued in December 2020, when President Lungu announced that the government planned to take a majority stake in selected mines, to make them more productive and provide a better return to the Zambian people. This was followed by an extremely controversial deal in which the government took on USD1.5bn of debt in return for a 73% stake in the Mopani Copper Mines, previously operated by Glencore.
As in the past, however, the government’s position regarding the mining sector proved to be extremely inconsistent, and in early 2021 it was made clear that, despite Lungu’s previous comments, there would be no further mine takeovers in the near future. Although the deal for Mopani was a voluntary one, this episode, and growing fears over mismanagement and corruption, have further eroded investor confidence.
The state of the economy, the controversy over Lungu standing for a third term, and the government’s efforts to clamp down on opposition party activity all increase the risk of political violence as the country moves towards the August general election. The main opposition leader, Hakainde Hichilema, has already accused the government of manipulating the electoral register to give itself an unfair advantage, and of using COVID-19 as an excuse to undermine Zambia’s civil liberties and political rights.
Widespread rumours that the government plans to arrest Hichilema on trumped up charges, to prevent him from being on the ballot paper, may prove exaggerated but give an indication of how high political temperatures are running. If the election result is controversial -- which is all but guaranteed -- unrest in urban areas is likely. However, 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.
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 and then again to 8% in September 2020, before increasing it to 8.5% in February, to combat inflationary pressures.
The Kwacha has continued gradually to lose value against the US dollar, sliding from 20.84 to the dollar in December to 22.45 to the dollar at the end of April due to a record 42-day ‘losing streak’. The price of copper, which is crucial to the economy, has rebounded from its sharp fall early in the pandemic to a recent high of over USD10,000 per tonne in early May, far higher than its pre-pandemic value.
In the absence of debt cancellation, the government’s ability to meet its commitments will depend on the successful completion of a bailout with the IMF. This will be necessary to generate the economic breathing space Zambia needs and because a number of significant lenders have indicated that any debt restructuring or reduction plan will depend on a prior agreement being reached with the IMF.
It is highly unlikely that investors will be able to recoup their investments in many cases. China has already signalled that it may be willing to write off some, though not all, government loans, and even before the default the country’s Eurobonds were trading at around 43-45% of their face value.
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