Zambia | Plenty to do after elections says Bank of America Merrill Lynch

Lusaka, Zambia, Capital Markets in Africa — Our caution on Zambia, and hence our Underweight recommendation, was based on downside to copper prices and the government’s unwillingness to engage in an IMF program. Following our meetings with policymakers in Lusaka, we are now more confident that an IMF program will be taken, although our base case of a post-election program remains unchanged. We expect a program to start soon after the elections, regardless of who wins. Despite our expectation of a 9.5% fiscal deficit this year, debt-to-GDP (54%) and the current account balance (-3.9%) are moderate compared with other twin-deficit economies, such as Ghana and Kenya. Given that the government has not yet started wide-reaching consolidation efforts and copper prices are now stabilizing, we expect momentum under a new program to be strong.

The recent IMF statement following a visit to Lusaka declared that the Zambian authorities would provide more details on their plans for a program in April. However, we are somewhat cautious. First, the commitment to address budgetary pressures (through lower discretionary spending and higher electricity tariffs for example) is very similar to the “credible package of measures to lower the fiscal deficit” following the IMF’s visit in November. Since the November visit, the government has made few changes, with electricity prices increased and then lowered again, and the road building program ongoing. Even though we believe a program will be implemented regardless of the election winners, we think it will be hard to obtain approval for an IMF program due to: (1) the absence of credible reform action ahead of the elections as the government focus already seems to be on the campaign; and (2) uncertainty about who will be in charge, especially as a run-off appears likely. Balancing the likely improvement in the fiscal balance after the elections with the strong possibility that a program will not be announced in the short term leads us to recommend a Marketweight position on Zambia EXD.

The copper sector is still under pressure but all parties are clear that the new sliding scale royalty rate (4-6% depending on the copper price) is here to stay and there should be no more changes. This relative regulatory certainty is a positive, but the mines still have to deal with the power crisis (given that the majority of power produced goes to the mining sector) where discussions are ongoing concerning their access and the tariffs they will pay. For the economy overall, power supply should improve as independent power producers are connected to the grid and the government makes a concerted effort to improve electricity production before the elections. However, this does not come cheap; the IMF estimates that emergency electricity imports are costing US$660mn/year, or 3.2% of GDP

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