In anticipation of the Day of National Prayer this past week one of my colleagues jokingly tabled that in addition to peace and reconciliation, as a nation we also need to have specific prayer points directed towards Chinese growth and the global copper price. In as much as it was light banter shared among colleagues, I couldn’t help but think about how there was actually a lot of seriousness behind this statement. Given the news from the IMF stating that “no substantive talks” regarding an aid package for Zambia would be discussed at their last meeting, we actually need the Chinese to keep growing and buying copper. The improved copper prices and demand for the metal are basically what have allowed us to continue to kick the can of serious fiscal consolidation and debt reduction down the road, especially since the serious risks such as inadequate power generation, potential politically instability and poor rainfall have waned.
Leading up to and post the presentation of the national budget, a lot of rhetoric came out of the press regarding the financial health of the country and predictions and analysis of what was likely to come out and what came out of the budget. I for one was expecting to see bigger expenditure cuts than what was presented. Nevertheless, The Ministry of Finance and the Bank of Zambia continue to present an optimistic picture regarding fundamental economic indicators such as improved GDP growth, low inflation and the stability of the foreign exchange rate. Private sector reports also echo the pronouncements of government with Stanbic Bank releasing PMI (previously known as Purchasing Managers Index) numbers for the past few months that indicate that the economy has improved and recorded significant growth in 2017.
You see, in the world of economics “sentiment” plays a very big role in the direction that markets and eventually economies move. How we perceive the information we receive inadvertently determines how we act; if we are made to believe that things are good, we will act in ways that would eventually make things good, it’s a self-fulfilling prophesy. Simply illustrated, if I believe I will have more money in the near future, I’m likely to spend more now knowing that I don’t have to worry so much about saving for the future. Consumer spending is one of the major factors that contribute to GDP growth. Therefore more spending, more growth and more perceived credibility for our Government’s financial divisions.
All of the positive reports on Zambia’s economy are welcome, except I’m not sure if I am convinced that enough has been done to guarantee that the path of economic recovery that we have recently embarked on can be sustained into the medium term (especially given the negative news regarding an IMF package that typically acts as a stamp of assurance for foreign investor). The Zambian economy receives a substantial amount of what is commonly abbreviated as FDIs, that is, Foreign Direct Investment. This is a source of foreign currency inflows for the country, expertise and skills as well as the huge favorite: the shiny promise of job creation for the locals.
Zambia being what is termed as an emerging market economy is highly prone to the risk of capital flight, or what investors term as “hot money” i.e., large volumes of foreign money that comes into the country for investment purposes (whether financial or capital) that could pull out of an economy when perceived risks increase beyond their risk tolerance. Therefore, in the event that country’s risks go up “too much,” Zambia is likely to face economic shocks and inflationary pressures as a result of the depreciation of the local currency that would occur if foreign investors within a short space of time decide to all pull out of the country by dumping kwacha and reconverting it into foreign currency. It is useful to note Zambia is currently a net importer in this case a depreciated currency leaves us vulnerable to increased prices of imported goods and consequently inflation.
China has been the top consumer of copper this year and this has been on the back of the exceptional growth that the Chinese economy has experienced. The growth of China combined with global supply hiccups from major copper producing countries such as Chile and Indonesia have played a role in spurring investor sentiment around the red metal, driving its price up from late last year. Some analysts predict muted growth for the Chinese economy in the near term. However, analysts also predicted lower 2017 growth numbers and have consistently gotten rude shocks when the contrary occurred. The proceeds from copper exports and improved rainfall patterns are what seem to have kept the Zambian economy afloat. With no IMF deal in sight and national debt (both domestic and foreign) sitting at about 47% of GDP and talks of expensive development projects still on the table which are likely to exacerbate the debt position, I would say prayer may not be such a far fetched recommendation after all. May the odds forever be in our favor!