Previous Quarterly Editions
Expropriation Risk: 64 67 67 69 Political Violence Risk: 68 68 68 68 Terrorism Risk: 20 20 20 20 Exchange Transfer and Trade Sanction Risk: 64 65 65 66 Sovereign Default Risk: 82 82 82 85
TREND ▲ OUTLOOK ▲
Zambia’s political landscape remains tense as the economy continues to deteriorate. Increasing support for the opposition appears likely to be met with further tightening of the government’s clampdown on dissent. Talks between President Edgar Lungu and opposition leader Hakainde Hichilema initially led to a period of détente but failed to deliver an agreement on how to avoid further clashes. Moreover, since the Constitutional Court ruling at the end of 2018 that Lungu is eligible to stand in the 2021 presidential election, his allies in the ruling PF party have taken an increasingly aggressive stance that has included threats to shut down the Socialist Party. The government has also exploited divisions within Hichilema’s United Party of National Development (UPND) to co-opt influential members of the opposition. Most notably, former PF leader and current UPND Vice President Geoffrey Bwalya Mwamba is widely expected to re-join the government having fallen out with Hichilema and his move will considerably strengthen Lungu’s re-election prospects. Having cowed civil society and undermined the independence of the electoral commission, the president remains the favourite unless the economy deteriorates further. However, the ruling party faces internal difficulties of its own after Kelvin Fube Bwalya, a popular Lusaka-based lawyer, announced plans to challenge Lungu for the PF presidency by holding him responsible for the country’s economic difficulties. In May, the kwacha fell further against the dollar after the IMF cut its growth forecast for Zambia this year from 3.1% to 2.9%. The rising cost of government borrowing has renewed concerns about an impending debt crisis. In March, Finance Minister Margaret Mwanakatwe confirmed that external debt had increased from 8.74 billion dollars in 2017 to 10.05 billion dollars in 2018, with debt servicing costs reaching 760 million dollars. Rumours late last year that the country was so far behind on debt repayments to China that it was having to sell off key assets to Chinese companies was the main trigger for riots in November in Kitwe, on the country’s Copperbelt, that the government subsequently blamed on Hichilema. In April, the government lost a landmark by-election in the Copperbelt when a previously safe PF seat was won by an alliance of opposition parties working together, although whether this alliance can be sustained or extended through to the 2021 elections is unclear.
The government continues to look to the mining sector as a means of solving its economic problems. In May, the High Court placed Kendanta Copper Mines (KCM), the local subsidiary of Vedanta Resources, under a provisional liquidation order following a court petition by state-owned mining company ZCCM Investment Holdings. The move came after efforts by Vedanta to hold talks with the government following President Lungu’s threat to withdraw its mining licence. The already poor relations between the mining sector and the government deteriorated further when both KCM and Glencore subsidiary Mopani Copper Mines announced the scaling back of operations in response to higher royalty rates from the start of the year and a controversial new tax regime that replaces VAT with a new sales tax. The government’s failure to pay VAT refunds has also hit the mining sector particularly hard. The potential nationalisation of KCM will play well with parts of Lungu’s domestic constituencies, which explains the government’s move, but further evidence of resource nationalism will do further damage to the country’s growth prospects.
TREND ► OUTLOOK ▲
Talks between President Lungu and Hakainde Hichilema have failed to generate a new era of political consensus. Instead, the opposition leader accused Lungu of trying to kill him in February when police and activists from the ruling party opened fire on a rally that Hichilema was addressing. Video of the incident, which shows men and women hiding behind vehicles as the sound of gunfire is heard, circulated widely on social media. While political violence remains rare in Zambia, it will become increasingly likely if economic decline continues to undermine the president’s popularity and the PF continues to use the security forces to harass opposition parties.
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.
TREND ▲ OUTLOOK ►
In its April forecast, the IMF expects that inflation will exceed 10% in 2019 and rise to 12% in 2020. This is up from 6.6% in 2017 and signals the failure of the government’s plan to keep inflation in single digits. The kwacha has consistently weakened against the dollar as the worsening economic outlook as well as the dollar’s strength, losing 30% of its value since mid-2018. The country’s continued dependence on copper exports for foreign exchange, together with strained relations with international donors as a result of both democratic backsliding and corruption scandals, will ensure continued instability moving forwards.
Although the cost of borrowing continues to rise, Zambia is still contracting external and domestic debt at an unsustainable rate. The yield for the country’s Eurobonds, which are the worst performing of any emerging economy, are increasingly inverted, with shorter-dated securities generating higher yields. Between February and April, yields on the bonds due in 2022 climbed 500 basis points to 17.45%. This represents the highest figure of any country that is not in debt default, suggesting that investors are already treating the country as in the midst of a debt crisis. Central bank reserves, which fell from 2.4 billion dollars in 2016 to 1.7 billion dollars in 2018, could fall below one billion dollars within months. Further evidence of the country’s indebtedness is already affecting attitudes in China, Zambia's principal creditor over the last decade. Avoiding debt default in the medium term will therefore require either far greater fiscal discipline than the government has demonstrated up to now, or the rescheduling of debt and an international rescue package. However, although the government has described recent meetings with the IMF and the World Bank as a success, there is no evidence that the country is any nearer to securing a much-needed economic recovery and adjustment package.
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