Zambian Kwacha Analysis for March 2013 by Kampamba Shula

Exchange Rate Analysis

 

The Month of March has been a turbulent month for the Zambian Kwacha against the Dollar. As can be seen from the graph there has been a general upward trend in the rate the whole month. Notice the trend began on the 13 of March 2013.All things remaining equal, we could possibly see the Dollar reach levels of K5.5 for selling and K5.4 for buying.

The most logical explanations for the exchange rate behavior can both be attributed to the Mines and macroeconomic factors.

Firstly, the Mines prior to the recent statutory instrument introduced by the Honorable Finance minister where allowed to take profits from Mining operations outside of the country. This created a high demand for dollar because borrowing in US currency became expensive. As with any statutory instrument there is an implementation lag which may take up to as much as 6 months before we begin to see the effect of this instrument.

Secondly, the price of Copper per tonne has fallen to levels of around $7,000. This has been due to weaker PMI (China’s Manufacturing Index) numbers from China.

Stronger figures both from the housing market and growth numbers has renewed optimism in the US Economy. Some of the trend we see in the exchange rate is due to macroeconomic factors out of Zambia’s control.

Global Economics

As for speculation as to whether the Cyprus Financial Crisis in Europe was going to affect Zambia it’s unlikely. On Monday the Euro zone in conjunction with Troika managed to salvage a deal that will treat the two main Banks in Cyprus that were trashed because of the restructuring of Greece’s sovereign debt. Cyprus banks held Greek Bonds. IMF Managing director Christine Lagarde outlined this plan to prevent contagion spreading to Europe’s periphery.

Disclaimer: Derivations based on Fundamental Speculation.

 

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The Profit of Zambian Mining analysed by Kampamba Shula

The Profit of Mining

Firstly, Zambia does not benefit extensively from mining operations the way it should. All countries that depend on natural resources face the shared challenge of taxation: determining tax levels and administering tax revenues in an effective manner that balances the needs of Government and investors. Mining depletes a valuable natural asset and taxing the mining companies is a way of generating savings that can be redeployed to increase the productive capacity of the rest of the economy, and thereby help sustain the country over the long-term. Despite the revival of the industry post-privatization, the mining industry’s contribution to government revenues in Zambia has remained low.

Last year, Mining accounted for 8% of the total GDP of the country, but more than half of the export earnings. Let’s be serious, if Zambia’s main export is copper and mining accounts for only 8% of GDP something must be very wrong here.

Now such figure gives rise to the argument that mines should be taxed more, which has recently been done as the royalty tax was doubled from 3% to 6%. But this does little to solve the problem which most of the public and some policy makers seem not understand.

The problem is twofold, firstly from the lack of Zambian equity in mining companies which has allowed foreigners to take back profits from mining operations to their own countries and the lack of vertical integration of value adding activities to the minerals we produce.

Equity

We shall deal with the ownership of the mines first. Mining companies in Zambia include Mopani, Glencore, First Quantum minerals , Konkola copper mines to name a few. Zambia consolidated copper mines; a government parastatal owns 10% in Mopani. Generally after privatization of the 1990’s Zambia sold massive amounts of equity in mining operations. The intentions of privatization where genuine, the execution left much to be desired. During this phase generous tax concessions where granted to mining companies and it is only in 2007 that the Zambian people woke up to this daylight robbery.  

Civil societies and other parties where keen to be advocating for what is termed “wind fall tax”. Windfall tax which could justifiably have its own article however is not the focus currently. But just as food for thought wind fall tax is a tax on excess profits of mining companies during boom periods. The problem with windfall tax is that it is based on the premise that things are always good, which in reality is far from the truth. Copper is currently trading at about $7,000 a tonne, which is way below its excess profitable margin.

 But I digress, back to the topic Zambians have little equity in mining most of which is owned by foreigners. When Foreigners get this money they send it back to their home countries. Now this causes two problems, firstly this distorts the exchange rate market and creates high dollar demand also making borrowing in dollars expensive. Secondly, this denies Zambia from keeping profits in the country and by function gross domestic product. Now this also deserves an article on its own but I shall not go into great depth for the following reason. Recently, this month in fact, the Honorable Minister of Finance Alexander Chikwanda introduced a statutory instrument that obliges mining companies to retain profits in the country. This like any other SI will take at least 6 months to come into full effect.

Vertical Integration

Now for those that think vertical integration is a complicated term here is the break down example. Take a farmer for example who plants potatoes and goes to sell them at the market. There is no vertical integration here. But if the farmer tell his son to cut the potatoes into slices, fry them and make chips, there is vertical integration there. Obviously the farmer will be able to make more profit selling the potatoes as chips rather than as whole potatoes.

The same example applies to Zambia and its copper production. Zambia exports copper to China as a raw material. China then manufactures copper wire cables and other electronic components which it packages and sells back to Zambia. There is no vertical integration for Zambia here. But if Zambia invests in a manufacturing base where it can transform the raw copper material into copper wire cables and other electronic components, there is vertical Integration there. As with the Farmer example Zambia will be able to make more profit after vertical integration than just selling copper as a raw material.

 

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Cyprus Financial Analysis by Kampamba Shula

Cyprus Analysis

The cause of the problem

Cyprus has a debt to GDP ratio of about 123% and Greece has a debt to GDP ratio of 150%.Cypriot banks held a substantial portion of Greek bonds therefore exposing themselves to this sovereign debt crisis. There is a high correlation between the two countries.

Current events

The Cyprus Financial crisis has dominated much of the Eurozone’s attention in recent weeks. The EU and IMF proposed a one off bailout plan that included taking 6.75% from deposits less than EUR 100,000 and 9.9% of deposits greater than EUR 100,000. This was, as expected rejected in the Cyprus Parliament.

Unsurprisingly, given the decision of the centre-right governing party MPs to abstain from the vote, the Cyprus parliament voted against the proposed one-off "stability levy" on resident and non-resident depositors. 36 of the 56-seat parliament voted against a bill which had been only slightly amended from the original plan announced at the weekend. The bill kept the levy on all deposits over EUR 100,000 at 9.9% and kept the levy on deposits below EUR 100,000 at 6.75%. The only change was that deposits below EUR 20,000 would be exempt. So, even if the bill had been passed, it would not have raised the EUR5.8bn required by the Euro group in order for the ESM to provide the EUR10bn rescue package needed by Cyprus (HSBC Global Research, 2013).

Eurozone needs to loosen up

The reason for this line of reasoning is simple. The current terms of the bailout are unreasonable and unprecedented, no other country even the embattled Greece has had to pay for its bailout using a portion of Citizens bank deposits.

Depending on how markets and the various games of brinkmanship play out over the next few days, this cannot be ruled out but currently Eurozone leaders are standing very firm in saying that EUR10bn is the maximum package and that EUR5.8bn has to come from bank deposits. They are mostly singing from the same hymn sheet too in repeating the "Cyprus is unique" line in an attempt to limit contagion to the rest of the periphery. This has been reinforced by some of their actions over the past few days as well. At the weekend meeting when the Cyprus deal was reached, the Euro group agreed to adjust the maturities of the EFSF loans to Ireland and Portugal in order to smooth the debt redemption humps. By showing that they are still increasing their support, and easing the terms for such countries, they may hope to reinforce the message that Cyprus is an exceptional case with no feed across to other member states.

More Help from Russia

More assistance from Russia would be very hard to negotiate too. Two years ago Russia extended a EUR2.5bn loan (maturing in 2016) at a 4.5% interest rate when the Cyprus government first faced difficulty tapping the government bond market. Last year the previous government in Cyprus tried and failed to secure more. Some more novel arrangements are now being mooted ranging from a full-blown bailout by Gazprom, in exchange for future exploration rights to the big offshore gas field discovered recently by Cyprus, to the possibility of shares in the national gas company being given in exchange for the 9.9% tax (or possibly a much higher one) imposed on Russian deposits in Cyprus.

According to Reuters, a European Commission spokesperson clarified on Tuesday that the guarantees only exist in the event of a bank failure not "a one-off levy which will be applied as a fiscal measure". But it is also fairly likely that the Eurozone and Russia soften their line a little too and provide slightly more assistance, particularly if any further loans are backed by future natural gas revenues. The Eurozone may be quick to remind Cyprus that, if it does not accept the bailout deal, it faces financial sector collapse and potentially euro exit, but Russia, Germany and the Eurozone are also well aware of the potential damage to their own economies under such a scenario.

The government’s alternative plan may include a new version of the deposit tax, according to an official who spoke after a meeting of the Cabinet yesterday and who asked not to be identified in line with government policy. The country’s central bank declared that lenders would remain shut for another two days, effectively barring Cypriots from their accounts until March 26 when they’re due to reopen after a national holiday on March 25 (Georgiou, 2013).

 

Bibliography

Georgiou, G. (2013, March 21). Bloomberg. Retrieved March 2013, 21 , from www.bloomberg.com: http://www.bloomberg.com/news/2013-03-20/cyprus-seeks-new-funding-plan-as-bank-closure-extended.html

HSBC Global Research. (2013). Cyprus. London: HSBC Global Research.

 

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African Capital Market Analysis by Kampamba Shula

African Capital Markets

This is the first edition in a collection of articles analysing the African Capital Markets.More articles of this nature with greater insight and analysis will be prepared.

Market Index	1-Month Return	1-Year Return	3-Year Return	5-Year Return	6-Year Return	Year to Date Return	Avg Weekly Trade Volume
Botswana Stock Exchange	-0.1%	-0.6%	-10.6%	-23.2%	-14.2%	0.8%	$2.6m
Bourse Régionale des Valeurs Mobilières	6.9%	27.5%	34.8%	-25.2%	N/A	14.5%	$3.7m
Dar es Salaam Stock Exchange	0.9%	12.3%	9.2%	5.0%	19.0%	-1.0%	$0.5m
Ghana Stock Exchange	33.3%	54.5%	49.0%	N/A	N/A	37.0%	$1.8m
Johannesburg Stock Exchange	-2.6%	-7.5%	25.7%	17.7%	33.8%	-9.3%	$3,342m
Lusaka Stock Exchange	8.3%	-0.3%	33.1%	-34.5%	53.4%	2.8%	$1.0m
Malawi Stock Exchange	-5.2%	N/A	N/A	N/A	N/A	-11.5%	$0.1m
Nairobi Securities Exchange	5.6%	55.0%	50.2%	19.7%	26.5%	14.5%	$26.2m
Namibian Stock Exchange	-0.6%	-0.4%	61.9%	72.7%	139.7%	-4.1%	$1.1m
Nigerian Stock Exchange	4.7%	78.6%	65.1%	-48.6%	-8.6%	17.3%	$98.1m
Stock Exchange of Mauritius	1.8%	8.7%	16.1%	-32.0%	68.1%	6.6%	$7.2m
Uganda Securities Exchange	10.1%	48.0%	39.8%	12.6%	9.4%	24.6%	$0.5m
Zimbabwe Stock Exchange	0.4%	61.6%	N/A	N/A	N/A	22.3%	$7.2m
S&P 500	1.1%	10.9%	37.1%	13.8%	8.3%	6.2%	N/A

Stock Analysis
 

Best Performing Stocks

Ghana Analysis

The best performing Stocks in Africa in US Dollar-Adjusted Returns as of February 28, 2013 have been from Ghana, Uganda and Zimbabwe.

Ghana scored a year to date growth rate of 37% with an average weekly trading volume in the range of $1.8mil. The Ghana Stock Exchange (GSE) is the principal stock exchange of Ghana. The exchange was incorporated in July 1989 with trading commencing in 1990.

 

Uganda Analysis

Uganda scored a year to date growth rate of 24.6% with an average weekly trading volume in the range of $0.5m.

Kenyan firms cross-listed on the Ugandan stock market were the main movers of the neighbouring country’s bourse in 2012, trading data up to the end of the year has showed.
The high capital gains of Kenyan firms listed on the Uganda Securities Exchange helped to lift the bourse’s valuation, according to a summary report done by the country’s Capital Markets Authority (CMA).
About seven Kenyan firms are cross-listed on the Ugandan exchange out of a total of 15 companies that are traded on the bourse.
“The rise in market capitalisation was driven by an increase in the market capitalisation of five cross-listed counters (Nation Media Group, Kenya Airways, Jubilee Holdings, East African Breweries Limited and Equity Bank Limited), Bank of Baroda Uganda as well as the listing of Umeme shares,” says the latest CMA (Uganda) Monthly report.

Between January and December 2012 the USE’s market capitalisation increased by 36 per cent to $5.81 billion from $4.26 billion, driven mainly by the strong performance of Kenyan stocks.

KCB’s share, which is also cross-listed on the USE, was not included in CMA Uganda’s report but its stock was the highest performer of all cross-listed shares in 2012, appreciating by 80 per cent in 2012.

KCB’s share price closed 2012 at Sh29.75, an 80 per cent increase from the Sh16.80 opening level for 2012.

Nation Media Group’s share price rose by 57 per cent to Sh222 from Sh140, EABL rose by 54 per cent (Sh264 from Sh175), Equity Bank 44 per cent (Sh24 from Sh16.75), Jubilee Insurance by 11.61 per cent (Sh173 from sh155).

The other Kenyan firms cross-listed on the Ugandan bourse are Centum and Kenya Airways, which saw their share prices drop over the year.

Centum’s share price went down marginally to Sh12.40 from Sh13.50, a 5.34 per cent drop.

Kenya Airways saw its share price slump in 2012 to Sh11.25 from Sh20.50, a 45 per cent drop, but its total market capitalisation has risen due to the addition of one billion shares from the rights issue.

At the beginning of 2012 and before the rights issue Kenya Airways had a Sh9.4 billion market capitalisation, but after the rights issue this rose to Sh16.69 billion despite the price drop.

 Ugandan utility provider, Umeme, is cross-listed on the Nairobi Securities Exchange (NSE).

Overall Kenyan firms account for around 85 per cent of the USE’s market valuation, which makes the capitalisation of the two exchanges move in unison.Ugandan stockbrokers and investment banks said the lack of seamless trading between Ugandan and Kenyan investors had created inefficiencies between the two bourses.

African Alliance Investment Bank (Uganda) chief executive Ken Kitariko said the lack of a seamless trading platform between the USE and the NSE has limited fund managers and retail investors from active trading in cross-listed stocks.

This is a tricky situation for Uganda because given that the market capitalization of USE of about 85% is accounted for by Kenyan shares.

Zimbabwe Analysis

Zimbabwe scored a year to date growth rate of 22.3% with an average weekly trading volume in the range of $7.2m.

The Zimbabwe Stock Exchange, or ZSE, is the official stock exchange of Zimbabwe. It has been open to foreign investment since 1993. Despite the shrinking of the economy since 2000, the stock market inversely reacted to the factors that affected the economy negatively. The ZSE was driven mainly by speculation as investors sought to hedge against hyperinflation (Kosmas Njanike, 2009).

The ZSE’s main industrials index has added 20.3% since the beginning of the year, making it one of the best performing bourses.

 Foreign investors seem to be behind the ZSE’s rally, with South Africa-based players like Allan Gray, African Alliance and Renaissance Securities broking deals for the foreigners.

Market capitalisation is a measurement of size of a business enterprise (corporation) equal to the share price times the number of shares.

 The market capitalisation opened the year at $3,93 billion.Total turnover from January 2 to February 28 this year stood at $82,7 million. At the close of February Delta Beverages was valued at $1,3 billion.

 Official figures show that counters in the consumptive sector Econet, British American Tobacco, SeedCo, Innscor Limited, Hippo Valley, OK Zimbabwe, Old Mutual, Dairibord and National Foods dominated the top 10 market capitalisation.

 A Harare-based analyst said the fact that the counters were top on the ZSE was an indication of the low disposable income by the majority of people.

 “These counters sell goods that people consume everyday while counters that sell other goods such as capital goods don’t have big market capitalisation,” he said.

The government plans to demutualise the ZSE in order to expose it to market forces in line with global trends.

 6 Year Return

The Namibian Stock exchange actually has the best 6 year return with a growth rate of 139% and average weekly trading volumes in the range of $1.1m.It is followed by Mauritius, Lusaka then Johannesburg.

Bibliography

Kosmas Njanike, P. K. (2009). Factors Influencing the Zimbabwe Stock Exchange Performance (2002-2007). Annals of the University of Petrosani, Economics, 2009, vol. 9, issue 2, pages 161-172.

 http://investinginafrica.net/african-stock-markets/african-stock-market-performance/?goback=%2Egde_2225001_member_219024402

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