The week beginning June 16 will see Zambia, Africa’s second-largest copper producer, present a supplementary budget to Parliament on Tuesday, June 18, as authorities seek to mitigate the economic impact of a severe drought. Investors will be closely watching market reactions, particularly in currency markets, following Moody’s upgrade of Zambia’s long-term issuer rating to ‘Caa2’ from ‘Ca’ and the upgrade of both local and foreign currency long-term issuer ratings to ‘Caa3’. Here’s a detailed analysis:
Drought Crisis and Agriculture Budget Disruption
Zambia is grappling with a severe drought that has significantly reduced its power generation capacity and threatened food security for 7.5 million citizens. The government is close to securing $388 million in drought relief funding which the copper producer has formally requested for augmentation of the existing $1.3 billion Extended Credit Facility (ECF) to $1.7 billion to be tabled at the International Monetary Fund Board meeting this month. Additionally, Zambia has received $550 million in pledges from international donors towards humanitarian support following its declaration of drought as a national disaster and emergency. However, this crisis has disrupted the 2024 agriculture budget. Finance Minister Situmbeko Musokotwane had aimed to transform the agribusiness sector through supply-side wealth creation techniques, but the drought has necessitated a call for $940 million in additional budget support. Musokotwane will present his first supplementary budget under President Hakainde Hichilema’s administration to reallocate fiscal spending towards the most vulnerable segments of society.
In a press statement from the Information Ministry on June 10, it was announced, “Cabinet approved the 2024 revised budget. The government has found it necessary to revise the 2024 Budget to protect vulnerable households against the effects of the drought, while building resilience and sustainability through the implementation of early recovery interventions in line with the declaration of a State of Disaster and Emergency. Further, the revised Budget takes into account the debt restructuring agreements reached with all creditors and the current macroeconomic conditions.”
Fiscal Challenges and Energy Deficit
The Bank of Zambia, acting as the state’s borrowing agent, has faced a series of under-subscriptions in government securities sales, highlighting significant fiscal challenges. Additionally, Zambia is contending with a 750 MW electricity deficit, resulting in daily blackouts of 12-15 hours. The government is under pressure to expedite power generation projects and seek import solutions despite the fiscal strain.
The IMF recently reached a staff-level agreement, emphasising the need for the Ministry of Finance to realign its fiscal priorities to support vulnerable communities and expedite energy sector reforms to level the playing field for the private sector.
A supplementary budget indicates that Musokotwane will exceed the K173 billion allocation of the 2024 expenditure plan and may seek parliamentary approval for additional funding under the Public Finance Management Act.
Currency Strengthening Bias
The Zambian Kwacha has shown a strengthening trend, closing at K26.15 per dollar for the week ending June 14, supported by weak economic activity and low local currency liquidity. The market anticipates an influx of K4.1 billion in new liquidity from treasury bill sales and government security maturities, which will influence the currency’s performance in the coming weeks. Dean Onyambu, Executive Head of Treasury and Trading at Opportunik Global Fund, predicts a continued strengthening bias for the Kwacha, potentially breaking below the K26.00 mark in the second half of the year.
First National Bank Zambia Chief Economist Chileshe Moono noted, “Fundamentally, our currency remains unchanged. Tight Kwacha liquidity conditions have supported some strength in the last few weeks as offshore unwind their USDZMW holdings; however, we expect demand conditions to pick up significantly in 2H24 as food imports commence in earnest and debt service on USD-denominated commercial debt continues. We only expect to see real currency strength next year as mining production recovers considerably. This, coupled with favorable ‘global risk on’ sentiment, should support a sustained Kwacha rally.”
With the reorganization of dollar bond debt, Zambia will resume debt service, adding a new wave of dollar demand.
Moody’s Upgrade and Market Sentiment
Moody’s has upgraded Zambia’s long-term issuer rating on foreign currency to ‘Caa2’ from ‘Ca’ and similarly upgraded the local currency rating to ‘Caa2’ from ‘Caa3′. This upgrade follows the successful restructuring of Zambia’s eurobond, with a bond exchange completed on June 10 on the London Stock Exchange. Fitch also upgraded the new bonds’ short-term issuer rating to ‘CCC+’ from ‘RD’ while maintaining the sovereign’s long-term issuer rating at ‘RD’.
These rating upgrades have boosted market sentiment, potentially attracting more capital flows into Zambia, which could further support the Kwacha’s strength. The upgrades signal a more favorable environment for capital pricing and could mark the beginning of a more stable financial era for Zambia.
Outlook
The upcoming weeks are crucial for Zambia as the government navigates fiscal adjustments, potential currency fluctuations, and the broader economic impact of the drought. The supplementary budget, debt restructuring outcomes, and external financial support will play pivotal roles in shaping the country’s economic trajectory.
The Kwacha Arbitrageur
