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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 1 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 24 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. 2 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. 3 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 KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International 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 such authority to obligate or bind any member firm. 4