Copper, IMF. Whats the Big Deal?
Mining

There has been a lot of deliberation around whether Zambia needs an IMF package and quite a bit of hype around positive global sentiments regarding copper prices over the short to medium term. Citi research has gone as far as predicting that copper will close the year at USD7000/tonne and this is good news for Zambia. Economic life has started coming back to the copper mining towns of the country with mining companies reinstating some of the miners that were laid off over the 2015-2016 period and have made bold statements committing to large investments in their operations to push up copper production by 10% to 850,000MT from 790,000MT in 2016.

Aside from being a litmus test for economic activity in the country, copper prices for any capital markets investor, (whether their interest is debt instruments, equity or both) is important as it is a significant factor in influencing the country’s Balance of Payments (BOP) position and the fiscal behavior of the government. The latter of the two highly influences the price that Government is willing to pay for locally borrowed funds. The relationship between the Kwacha/Dollar movement and copper prices remains correlated as the country is significantly dependent on copper for its foreign exchange earnings; copper contributes to about 70% of the country’s FX earnings which in turn finances about 30% of the National Budget. For Zambian Government, if copper prices are high, the country’s ability to rack up foreign reserves is improved and so is its ability support the budget and as a result is likely to be less inclined to finance its operations through debt.

In a free market economy there is an inverse relationship between interest rates and equity prices, that is, as interest rates go up, stock prices tend to go down. Two main reasons for the downward trajectory of stock prices in such instances are:

• Increased interest rates make debt financing for company’s more expensive which negatively affects their ability to invest to grow

• Investors tend to shift from the stock markets for the more lucrative returns in the fixed income markets and in some instances are willing to dump the stocks at prices lower than prevailing market prices

Copper prices at the tail end of 2016 started to rebound after what seemed like a glut for the red metal which began in April of 2015. The depressed copper prices coincided with other significant challenges for the Zambian national treasury: power shortages and back to back presidential elections being the most notable. Zambia being a net importer has an inflation basket that is highly exposed to foreign exchange risk, it therefore came as no surprise that inflation ratcheted up as the kwacha fell against the dollar. This put significant pressure on the economy as businesses were functioning in a high interest rate environment with unreliable power supply and were exposed to major foreign exchange risk exposure.

In 2017 we have seen power supply regularized, foreign exchange movements between the kwacha/dollar currency pair has stabilized and inflation and interest rates coming down. All of these factors presenting a good case for the new found optimism for the Zambian economy. So why then is the IMF package being pursued? As ZIPAR rightly put it in one of their recent articles on the subject, “Zambia may not need an IMF package but wants it.” This is because an IMF program is likely to encourage fiscal discipline, FX stability, provide BOP support, foreign investor confidence and a low inflation and low interest rate environment. It seems an IMF package is sought to act as a catalyst to the economic recovery that the country appears to have already commenced.

Sharing is caring!

(Visited 18 times, 1 visits today)
The information contained on this website is for general information purposes only. While we endeavour to keep the information as accurate as possible, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or subject companies or matters contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
 right-arrow   right-arrow