Download 2015 Quarter 1

2015 Quarter 1
Inflation - Consumer price inflation declined for a fourth consecutive month in March due to lower energy prices. At a reading of 7.2% y-o-y, this was 0.5
percentage points lower than the figure recorded in January, and 0.2 percentage points lower than February’s inflation reading. However, the outlook for
inflation remains on the upside due to a weak kwacha exchange rate, high fiscal spending and expected increases in administered costs.
Growth – Albeit still high in a global context, the Zambian economy expanded by a disappointing 6% in 2014, which is 0.5 percentage points lower than the
International Monetary Fund (IMF)’s initial projection, as the mining sector struggled with operational challenges. However, the agricultural, manufacturing,
construction and financial sectors, posted strong performances.
National development plan - The Revised Sixth National Development Plan (R-SNDP) 2013-16, forms the cornerstone of economic policy. The R-SNDP
provides an important step towards the realisation of government’s vision of transforming the economy into a prosperous middle-income country by 2030. The
focus of the plan is on socio-economic development, public capital investment and inclusive economic growth.
OPPORTUNITIES
STRENGTHS
Zambia is endowed with a wealth of natural resources, including copper,
emeralds and hydropower resources.
Zambia is strategically and geographically positioned to act as a trade and
investment hub in Africa.
Strong economic growth record and prospects, driven increasingly by
opportunities beyond the copper sector.
Track record of political stability.
Strong foreign direct investment (FDI) inflows on the back of natural resource
wealth and favourable tax incentives.
Zambia has a wealth of arable land and water resources, which provides strong Wide potential capital base and illustrated ability to tap international credit
opportunities in the agricultural sector.
markets for infrastructural funding.
Strong focus on road, rail, freight and power infrastructural development.
VULNERABILITIES
WHAT IS BEING DONE?
Due to copper’s position as leading recipient of FDI and export receipts,
Zambia is implicitly vulnerable to a slowdown in global economic growth.
Despite extensive reforms and a relatively liberal banking regime, financial
intermediation and credit to the private sector remain low.
A relatively challenging business environment, including poor infrastructure,
widespread corruption and inefficient bureaucracy.
Overall political risk profile remains low, but certain potentially negative
issues have arisen since September 2011.
Progress in terms of economic diversification remains sluggish, despite strong
fiscal incentives for investment in priority sectors (agriculture, manufacturing,
tourism).
The scope is very limited to loosen monetary policy and enhance private sector
credit growth, due to structurally high inflation.
Zambia’s business environment has deteriorated in recent months. The
country’s ranking in the World Bank’s Doing Business 2015 report fell by four
positions to 111th (out of 189 countries).
The government has illustrated greater leniency towards the private sector in
recent months, most notably with regard to the revision of the controversial
mining fiscal regime. This situation continues to unfold.
MEGA TRENDS
Population
14,638,505 (July 2014 est.); Age 15 - 64: 51.4%
Population growth rate (%)
2.88% (2014 est.)
Life expectancy at birth
Total population: 51.83 years; male: 50.24 years; female: 53.48 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 12.5%; People living with HIV/AIDS: 1.1 million (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 63.4%; male: 70.9%; female: 56.0% (2015 est.)
and write)
Urbanisation
Urban population: 40% of total population (2013); Urban population growth: 4.3% (2013)
Population below $1.25 (PPP) poverty line 74.3% (2010 est.)
Unemployment rate
13.3% (2013)
Employment (% of total)
Agriculture: 72.2%, Industry: 7.1%; Services: 20.6% (2005 est.)
Labour participation rate (% of total
population ages 15+)
79.3% (2013)
Business languages
Bemba, Nyanja, Tonga, Lozi, Lunda, Kaonde, Luvale, English
Telephone & Internet users
Main lines in use: 115,762; Mobile cellular: 10.40 million; Internet users: 2.25 million (2013)
Sources: CIA World Factbook, World Bank, UNESCO, ITU, UNAIDS & NKC Research
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Total
Zambia
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
Economic Freedom 2015 (1 most, 178 least free)
HDI Ranking 2013 (1 most, 187 least developed)
189
111
96
100
144
178
187
141
0
Source: NKC Research
175
85
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
B+/Negative
B/Stable
B1/Stable
Standard & Poor’s (S&P) affirmed Zambia’s sovereign credit risk rating at “B+” in a report dated 3 October 2014. The outlook was also affirmed at
negative. Previously, S&P downgraded the outlook on Zambia’s sovereign credit rating from stable to negative at the end of October 2013, citing the country’s
deteriorating fiscal metrics. The continued negative outlook reflects S&P’s view that Zambia’s weakened fiscal position renders the sovereign vulnerable to
renewed external pressures, and S&P warned that the ratings could be revised lower if external or fiscal pressures rise significantly. In turn, Fitch Ratings
affirmed Zambia’s sovereign credit risk rating at “B” in a report dated 13 March 2015, although the outlook was revised from positive to stable due to policy
coherence and credibility concerns. The revision captures Fitch’s view that policy coherence and credibility “are weak and a growing constraint on the
rating”. Fitch alluded to “numerous policy decisions” which “appear to have been legislated without widespread private sector consultation”, which, in
Fitch’s view, contributed to a weakening of the business environment. The rating agency cited the changes to the value-added tax (VAT) and the mining tax
regimes as examples of the breakdown of policy credibility. Fitch underlined the importance of engaging the private sector in policy decisions, and warned
that the mineral royalty tax – which is a tax on production rather than profit – could undermine the viability of marginal mines in the current low copper price
environment. Furthermore, Fitch expects that economic growth will moderate in 2015. On the other hand, Moody’s Investors Service released its annual
credit analysis report on 9 December 2014. In the credit opinion, which does not constitute a rating action, Moody’s stated that the “B1” rating with a stable
outlook (which the agency awarded to Zambia on 6 November 2012) reflects the balance of Zambia’s robust macroeconomic prospects against external risks.
The rating agency cited Zambia’s strong economic growth and “robust government fiscal strength” as supportive factors of the sovereign credit rating. The
rating agency expects that government projects aimed at increasing power output, improving agricultural productivity and addressing infrastructural
bottlenecks will support real economic growth in excess of 7% in 2015.
Infrastructure
Diversity of
the Economy
Banking
Sector
Poor, but
improving
Fairly limited;
dominated by the
copper sector
Fairly liberal
Continuity
of
Economic
Policy
Broad
continuity
expected
GDP Growth
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Strong
Fiscal deficit,
current account
surplus
Reasonable
Low
Modest
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Daily Trading
Volume
Yes
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Relatively limited
ZK65.44bn (April 10)
Retail
ZK35,852 (April 10)
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Relatively developed
Relatively limited
91-days to 364-days (Tbills)
2-Yr to 15-Yr (Govt.
bonds)
N/a
Yes
Macro-economic overview
Economic growth fell short of its potential in recent months as political agendas undermined Zambia’s ambition to establish itself as an attractive investment
destination. The Zambian economy expanded by 6% in 2014, which is 0.5 percentage points lower than the International Monetary Fund (IMF) projection.
The Zambian economy expanded by 6.7% in 2013. The larger-than-expected slowdown in real GDP expansion stems primarily from poor mining sector
performance. The mining & quarrying sector has contracted by an estimated 1.4% in 2014 due to operational challenges and technical shutdowns, including
the collapse of a conveyer at Lumwana as well as a liquidity squeeze as the tax revenue authority withheld VAT refunds under the controversial tax rule. The
mining sector further suffered from increases in administered costs, an escalation in the prices of imported capital goods and electricity constraints, against a
broader backdrop of a softening global copper price. In turn, non-mining output posted strong growth, expanding at an estimated 7% in 2014. The growth was
partially attributed to strong performances in the agricultural, manufacturing, construction and financial sectors.
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Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
11.0%
Service/GDP
64.5%
Industry/GDP
24.5%
The services sector accounted for an estimated 64.5% to GDP in 2014, and is firmly in the lead as the primary contributor of real economic growth. This is
driven by strong performance in the finance and banking, telecommunications and tourism services sub-sectors. The telecommunications sector, in particular,
has returned robust growth and continues to hold significant potential. In turn, the mainstay industry sector accounted for nearly a quarter of GDP in 2014. The
industrial sector is primarily dominated by the copper sector and downstream-related activities. Developments on the precious stones front – emeralds – could
furthermore see the industrial sector expand in the medium term. In this regard, Gemfields stated in April that a Zambian gemstone buying centre was opened,
which could increase the supply of local gems by “almost a third”. In turn, agriculture contributed an estimated 11% of GDP. Despite its relatively low
contribution to GDP, agriculture remains one of the economy’s most important sectors with regard to job creation. On aggregate, the level of
commercialisation remains relatively low, and subsistence farming is widespread and still provides the bulk of food production. However, the government
remains committed to developing and boosting the sector, as outlined in the country’s R-SNDP, which has identified agriculture as a priority sector in
achieving sustainable economic growth and reducing poverty.
Real GDP Growth & Net FDI/GDP
11.0
7.0
Source: NKC Research
10.0
6.0
9.0
5.0
8.0
4.0
7.0
3.0
6.0
2.0
5.0
1.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
While the copper sector will likely remain the largest recipient of foreign direct investment (FDI) in coming years, foreign interest beyond the extractive sector
continues to grow, in the agricultural and power sectors in particular. With regard to the latter, the government has indicated that it will continue to promote
private sector investment in the use of renewable energy and alternative sources of energy such as solar, bio-mass, geothermal and wind. In turn, the ongoing
development of the multi facility economic zone should help boost both domestic and foreign investment in the non-extractive sectors.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
2016F
Machinery & boilers
Ores, slag & ash
Mineral fuels, oils, distillation products
Main Imports: % share of total
2014E 2015F
2016F
Machinery & boilers
18.03
17.21
17.81
Ores, slag & ash
15.16
13.80
13.35
Mineral fuels, oils, distillation products
11.36
12.16
13.02
Vehicles other than railway, tramway
8.76
8.03
7.98
Vehicles other than railway, tramway
Main Exports: % share of total
Copper & articles thereof
Inorganic chemicals, precious metal
compounds, isotopes
Mineral fuels, oils, distillation products
etc.
Pearls, precious stones, metals, coins,
etc.
Source: NKC Research
Copper & articles thereof
0.0 2.0 4.0 6.0 8.0 10.0 12.0
Inorganic chemicals, precious metal
compounds, isotopes
Mineral fuels, oils, distillation products
etc.
Pearls, precious stones, metals, coins, etc.
2014E 2015F
2016F
78.09
80.68
77.64
5.80
6.22
5.52
3.79
3.72
3.50
3.39
3.48
3.42
Extractive sector commodities dominate Zambian exports, with copper accounting for three-quarters of export receipts. The country is the largest copper
producer on the continent after the Democratic Republic of Congo (DRC). A pivotal point with regard to the copper production and export trajectories is the
revision of the mining fiscal regime, which may provide an about-turn in the negative trend in goods trade performance. In terms of imports, machinery and
boilers dominate the import bill, owing to strong government-mandated and private sector fixed capital formation.
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Current Account & Budget Balance
(% of GDP)
4.0
-2.0
Source: NKC Research
2.0
-3.0
0.0
-4.0
-2.0
-5.0
-4.0
-6.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
Structurally, Zambia remains on a poor footing in terms of its fiscal account, owing to large recurrent expenditures and a fairly narrow revenue base. Albeit
moving in the right direction in terms of fiscal consolidation, failure to meet revenue targets impedes the creation of adequate fiscal space for infrastructural
and social investment spending. Due to the pecking order, recurrent expenditures take preference to capital formation. Zambia’s fiscal position remains
decidedly expansionary owing to the substantial power and transport infrastructure shortfall. In turn, the balance of payments position was undermined by
adverse developments in both the current and financial accounts in recent months. The negative trend in the external position underlines Zambia’s single
commodity dependence and narrow export base.
Average CPI (% change, y-o-y)
16.0
Source: NKC Research
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
Consumer price index (CPI) inflation trended lower for a fourth consecutive month in March, according to the Central Statistics Office (CSO). The annual
inflation rate eased to 7.2% y-o-y in March, 0.2 percentage points lower than the reading in February. In addition to a lower y-o-y reading for food price
inflation, the subindices alcoholic beverages & tobacco, utilities, and transport recorded deceleration in price inflation. This was partially countered by higher
annual readings for the subindices furnishings, household equipment & routine household maintenance, health, and education. The transitory benefits of the
lower energy price environment continue to filter through to the real economy. The near-term inflation outlook should further be aided by the reinstatement of
the maize subsidy to millers (albeit credit-negative with regard to the fiscal position). A key risk source to the monetary environment remains the local
currency unit. While the kwacha exchange rate will find a firmer footing in the short term on central bank action (the statutory reserve ratio was increased by
four percentage points to 18% on April 8) and promising developments with regard to the revision of the mining fiscal regime, we maintain our view that
kwacha recovery will fall short of paring recent losses. Our baseline view is that inflation will remain structurally high this year, thereby necessitating a
continuance of the conservative monetary policy stance, with a bias towards tightening.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Jason Kazilimani – designation is Partner
Tel +260 211 372 900
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon
such information or opinions.
© 2015 KPMG, a Zambia Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved. MC7204
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provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any
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