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By Matthew Hill , Bloomberg
Zambia’s Finance Minister Alexander Chikwanda is no admirer of the International Monetary Fund. With the nation’s currency plunging to a record and yields on foreign bonds approaching 11 percent, he may soon have to change his mind, according to Rand Merchant Bank.
The kwacha has slumped 27 percent this quarter, the most among more than 150 currencies monitored by Bloomberg, driving up debt-service costs and threatening to fuel inflation and undermine efforts to cut the budget shortfall. The nation’s dollar bonds lost 10 percent in the period, the most after Ecuador out of 31 emerging nations monitored by Bloomberg indexes, as yields on benchmark securities soared 251 basis points to 10.88 percent.
While Zambia’s Treasury has said it won’t need an IMF loan, Chikwanda is running out of options. Copper prices near six-year lows are weighing on the economy, which relies on the metal for more than 70 percent of exports. An electricity shortage because of low water levels at the Kariba Dam hydropower station is reducing mining output at a time when slowing growth in China is cutting demand for commodities and the prospect of a Federal Reserve interest rate draws money away from emerging markets.
“They will probably have to turn to the external market at some stage and seek out multilateral assistance,” Nema Ramkhelawan-Bhana, an analyst at Johannesburg-based RMB, a unit of FirstRand Ltd., said by phone on Friday. “If we continue to see the downward trajectory in commodity prices, specifically base metals, then it would force the finance ministry’s hand.”
President Edgar Lungu would consider exchange controls to arrest the kwacha’s “freefall,” the leader’s spokesman, Amos Chanda, said Sunday. That comes after Chikwanda and central bank Governor Denny Kalyalya said separately on Sept. 3 that currency restrictions would be a backward step. Chikwanda also rejected an approach to the IMF. Lungu on Sept. 4 directed Chikwanda to work with the central bank to “assess additional market intervention measures to address the observed excessive volatility,” the presidency said.
“The IMF is not the best mechanism for helping countries which are down,” Chikwanda said in a speech in Lusaka, the capital. “In some cases it even compounds your difficulties.”
Zambia’s budget deficit will climb to 6.7 percent this year, wider than the targeted 4.6 percent, according to the finance ministry. Standard & Poor’s, which downgraded Zambia’s credit rating to B on July 2, said the shortfall including debt payments may reach 14 percent of GDP.
Government should focus on ensuring the targets to cut the deficit outlined in its Medium-Term Expenditure Framework for 2016 to 2018 are achieved, IMF resident representative Tobias Rasmussen said in an e-mailed response to questions Sunday.
“There is still major political resistance to seriously undertaking a formal aid request,”Gareth Brickman, a market analyst at ETM Analytics NA LLC in Stamford, Connecticut, said in a Sept. 4 note. “It can only be assumed that shortfalls will continue being financed by excessive local debt issuance.”
Higher debt levels would worsen Zambia’s credit profile, increasing the need for IMF assistance, Brickman said.
Fiscal Prudence
The last time the deficit significantly overshot the target, it prompted government to consider an IMF program. The 2013 deficit was almost double government’s 3.1 percent target. In May 2014, Fredson Yamba, secretary to the treasury, said government would start formally engaging the IMF on an aid program. That never happened.
A year later, Yamba signaled that government didn’t need the aid, and was already undertaking most of the fiscal measures an IMF program would have required. The IMF hasn’t received an approach from government and will move quickly if it does, Rasmussen said.
“A staff team would visit Zambia to work with the authorities to develop policies and measures needed to stabilize the situation and put the country on a path of sustained and inclusive growth,” he said.
With an election looming, fiscal prudence may be difficult to maintain, said Irmgard Erasmus, an economist at Paarl, South Africa-based NKC Economists.
Zambia sold $1.25 billion of Eurobonds due 2027 in July at a yield of 9.37 percent, the highest ever for an African issuer. Yields on the securities have climbed to 11 percent. The kwacha weakened to a record low of 10.28 per dollar on Monday before paring losses to trade 1.2 percent down at 10.11 by 10:54 a.m. in Lusaka.
“With next year being another election year, there’s not much scope for an aggressive cut in expenditure right now,” Erasmus said by phone. “With the IMF you can get a more favorable debt. I don’t think that’ll be their first choice. I don’t think they like the strings attached.”
The government and the central bank shouldn’t be tempted to intervene in the kwacha’s movements, according to Caleb Fundanga, who headed the Bank of Zambia from 2002 to 2011. No central bank has enough resources to fight off “natural forces,” he said.
“If you allow the market to find the right price, you’ll have all these pressures once and then afterward people will settle down at the new equilibrium,” he said in a Sept. 2 interview in Lusaka. “I feel for my good colleagues at the central bank who must now be under a lot of pressure to intervene.”
By Matthew Hill , Bloomberg
