Africa’s second largest red metal hotspot Zambia, has retained eighth position in the Absa Africa 2019 index. This was confirmed in the Absa Africa Financial Index Report.
Commenting on the report Central Bank Governor Dr. Denny Kalyalya said:
“While there has been great leaps in the development of capital markets in Africa, there remains a gap in the intermediation role of African capital markets as domestic pools of funds from pension and insurance companies continue to see major growth. Therefore, more needs to be done to improve financial infrastructure and make Africa’s capital markets more attractive, in areas such as cross-border listings, settlements, and payments for transactions.’
Zambia’s performance in the Absa 2019 Index
Generally Zambia slipped on (3) key pillars namely market depth, access to foreign exchange and market transparency, tax and regulatory environment compared to the 2018 index.
Below is a summary outline of the copper producers performance across the (6) pillars:
1. Market depth – Zambia 8th (46 from 48). 2. Access to foreign exchange 8th (61 from 77). 3. Market transparency tax and regulatory environment 7th (75 from 77). 4. Capacity of local investors 18th (13 from 14). 5. Macroeconomic opportunity 19th (51 from 44). 6. Legality and enforceability of standard financial markets master agreements 7th (81 from 78)
Zambia’s performance on the sixth pillar which details legality and enforceability of standard financial markets master agreements. However Zambia alongside most African nations has still not adopted the Global Master Repurchase Agreement (GMRA) that governs repurchase agreements, often used in cross-border transactions as well as domestic repo markets. Nine (9) index countries are yet to use the GMRA, while others are either already using it regularly or in some limited way. Zambia is yet to use the Global Master Securities Lending Agreement (GMSL). Only six (6) index countries have used the GMSLA, indicating a reliance on domestic legal arrangements in the countries yet to adopt it. However Zambia uses the master agreement of the International Swaps and Derivatives Association is the most widely used contractual framework for Over-The- Counter (OTC) trading globally.
Zambia and Angola vulnerable to FX risk as reserves plummet.
According to the Absa Index report, ‘access to foreign exchange’ is the only pillar where average scores fell. Aggregated reserves grew modestly to $244bn from $233bn last year, but countries like Zambia and Angola are running low, leaving them potentially vulnerable to foreign exchange risk. Zambia’s reserves have plummeted to $1.45billion spelling an import cover of 1.6 months.
What the Absa Index is signaling about Zambia
Having followed the Index for the third year in a row, it is evident that African financial markets grapple with liquidity at various levels. South Africa remains the most liquid market in Africa scoring an average of 88 out of a 100 while other nations compete for scores of between 27-75 out of 100 (Ethiopia – Maurituis). Fiscal pressures and dislocations of from optimal monetary policy continue to reflect in the foreign exchange exchange market and the performance of local investors. Falling reserves and access to dollars is very evidently a pressure point for the copper producer and is causing widening vulnerability to stress shocks. One would argue that the asset sell off pressure from uncertainty given the structural issues the red metal producer faces is impacting performance of the money markets by local investors. Offshore players activity has muted in light of elevated sovereign risks measured by the CCC/CCC+/Caa2 (Fitch/S&P/ Moody’s) ratings. The local investors to be precise commercial banks are rolling over maturities to bid higher to leverage off higher yields on government securities. Suffice to say auctions are driven by reinvestments of maturities. Asides this over-dependence on pension funds for exit strategy breeding concentration risk remains a key theme in the Zambian market which is no different from most African jurisdictions. However one pointer that remains outstanding is that Zambia’s foreign exchange regime remains transparent and a floating benchmark second to none in Africa. The regulatory framework is also one of the most robust in Africa despite requiring improvements. While it’s easy to get into trading positions, it takes a while to exit them as liquidity pools remain shallow signaling the need for more fund managers to play in this market. Insurance companies, superannuation funds and other pools require increased activity to help Zambia’s position in the index to rally to levels where South Africa, Mauritius and Kenya are at.
Written by Mutisunge Zulu a financial risk expert. The views expressed in this commentary are purely the writers.
