Zambia 2014 First Half Economic Review: H1 2014
This is the first ever edition in the series which highlights the performance of the Zambian Economy in the first half of 2014.
Growth
Industrial Performance: Whole sale and retail grew by 31% while real estate and construction grew by 9.5% and 9.1% respectively
• The Whole sale and retail was the best performing sector in the first quarter growing by 31%.
• The real estate sector was the second best performing sector growing by 9.5%
• Construction was the third best performer growing at 9.1%
• Other sector performance
• Financial services growth of 2%
• Transport sector growth of 2%
• Energy sector was the worst performer contracting by 23%
• Manufacturing contraction by 14%
• Mining contraction by 2%
Agriculture
In terms of the National Food Balance Sheet for the 2014/2015 agricultural marketing season, the country has a significant maize surplus above the national maize requirement. Other crops expected to register an increase include rice, tobacco, millet, and groundnuts.
• The stock of maize held by the Food Reserve Agency (FRA) declined to 349,120.3 mt as at end-May 2014 from 644,682.4 mt at end-December 2013.
• Similarly, the stock of rice held fell to 1,560.0 mt from 1,948.5 mt during the same period. The decline in stocks is typical during the lean period, which runs from October to May. However, with the crop marketing season commencing soon, the stock of maize is likely to increase significantly.
• According to the Crop Forecast Survey results for 2013/2014 the country is expected to produce 3,350,671 mt of maize, 32.3% higher than 2,532,800 mt produced during the 2012/2013 agricultural season.
Construction
The pledge of US$3.3 billion is mainly in the construction sector which accounted for US$3 billion
Construction was the third best performer growing at 9.1%
Mining
China has began to revaluate its use of copper as collateral for loans. This coupled with lower manufacturing sentiment has contracted demand for commodities like copper.
• Mining sector contracted by 2% in Q1 but rebounded slightly in the second quarter
• Copper prices fell by 7% in Q1
• Weaker demand constrained supply of the usual foreign exchange reserves from the Mining sector
MOPANI Copper Mines in Mufulira has increased copper production by 2,500 tonnes in the first quarter of 2014 highlighting a growth rate of 10 per cent
First Quantum Minerals (FQM), the owner of Kansanshi copper mine in Solwezi, recorded a 43 per cent rise in copper production during the first quarter ended March 31 2014.
The increase is due to sound management of the factors under the mines control and benefits from the investments in process improvements.
Copper prices have trended down since reaching an all-time high in early 2011 and fell by more than 10% during the first quarter of 2014 (mainly in March), owing to market concerns about the Chinese economy, and linked to this the ability of Chinese firms to continue to use copper as collateral in trade financing which has supported higher global prices
Copper output rose to 473,249 mt during the period January to May 2014, compared to 399,515 mt produced during the same period last year. However, cobalt production was lower at 1,951 mt when compared with 2,709 mt produced during the corresponding period in 2013.
Energy
Fuel prices rose in Q1 by 7.22% for petrol, 8.75% for diesel and 9.54% for kerosene on the back of foreign exchange rate losses on the oil import bill.
In the energy sector, total electricity generation during the period January 2014 to May 2014, increased to 5,731,907 Mwh from 5,467,181 Mwh during the corresponding period in 2013. This reflects the investments made in power generation in order to raise power supply required to meet the high demand arising from increased economic activity in the country.
Inflation
Inflation has been on an upward trend since the beginning of the year with annual inflation rising to 7.9% in June from 7.1% in December 2013
Factors contributing to these inflationary pressures include
• The seasonal supply factor (lean pre-harvest period October-May), removal of Government subsidy on maize,
• Pass-through effects of the depreciation in the exchange rate, higher fuel prices
• Increase in excise duty on cigarettes and alcoholic beverages
Foreign Exchange Market
The exchange rate of the Kwacha against the US dollar has exhibited a depreciation trend since the beginning of the year. As at 11th June 2014, the Kwacha had depreciated by 14.9% against the US dollar to trade at K6.3348/US$ compared to K5.5126 per US dollar at the close of December 2013. This was mainly due to intra-day mismatches between supply and demand for foreign exchange in the domestic market on account of the following:
• A reduction in the supply of dollars to the market, particularly from the mining sector which accounts for the bulk of foreign exchange supply.
• The decline in copper price by 9.1% to US$ 6,691.00 per tonne as at 11th June 2014 from US$7,360.00 per tonne at the end of December 2013, which impacted on market sentiment.
• Deterioration in the current account balance to a deficit of US $260.7 million during the first quarter of 2014, from a surplus of US $28.7 million in the fourth quarter of 2013, mainly on account of stronger imports relative to exports and higher service payments.
• A significant build-up of liquidity over the fourth quarter of 2013 into the first quarter of 2014 (after civil service wage increase) and expanding informal trade sector which supported demand for foreign exchange.
• The strengthening of the dollar on the international financial markets has also impacted on the Kwacha, leading to a corresponding weakness in then Kwacha through financial flows.
Government and Private Investments
During the first quarter of 2014, the Treasury released K1 Billion for Investments and Special Projects
• K245 Million was released to the National Road Fund Agency
• K140 Million was targeted at remodelling works at the Kenneth Kaunda International Airport
• K35 Million for ZESCO rehabilitation works
Other Investments included
• K15 Million for recapitalization of the Government Printing Department
• K6.8 Million as GRZ support to the Millennium Challenge Account Compact.
• K6.4 Million was released for the Youth Skills Development Programme
Government Spending
Ministry of Finance released K168 Million grants to various institutions of government to facilitate their operations and efficient programme implementation in Q1
The Treasury has also released K84 Million for road maintenance, rehabilitation, and construction. K20.7 Million was released to the Ministry of Local Government and Housing for water and sanitation programs.
A further K166 Million was released for salaries for civil servants in various government institutions, compensation and awards, and for emoluments for personnel in Zambia’s Missions Abroad.
Foreign Direct Investments
Zambia recorded US$3.3 billion in foreign direct investment (FDI) pledges in the first quarter ended 31st March, 2014.
China recently emerged as Zambia's biggest source for FDI with inflows estimated at about US $1 billion, mostly into mining, manufacturing and construction sectors.
• Pledges reflect an increase in foreign direct investment in 2014 as compared to 2013 during the same period which recorded pledges of US$2.3 billion
• US$3.3 billion is mainly in the construction sector which accounted for US$3 billion, with the manufacturing sector accounting for US$132 million while other sectors contributed the rest of the FDI.
• The increase in FDI in the first quarter of 2014 as compared to the same period in 2013 further explains that regardless of how the economy is performing, increase in FDI is dependent on what the investor is looking for in terms of resources, market and the expected returns.
• Projection for the second quarter, the month of April has already recorded US$98 million in FDI pledges with pledged employment of one thousand forty five jobs from 25 projects.
Monetary and Fiscal Policy
During the period January to May 2014 monetary policy remained focused on achieving the end-year inflation target of 6.5%. In line with this objective, the Bank of Zambia (BoZ) tightened monetary policy by raising the policy rate from 9.75% in January 2014 to 10.25% in March, and then 12.0% in April 2014. The statutory reserve requirement was also increased by 600 basis points to 14% with effect from 10th March 2014. Following persistent volatility in the exchange rate, the Bank of Zambia took further measures to tighten liquidity in the banking system by extending the application of statutory reserves to government deposits and vostro accounts, as well as tightening the maintenance regime for statutory reserves.
Money market liquidity, as measured by commercial banks current account position, decreased by 46.8% to K593.6 million at end-March 20145 from K1,115.7 million at end-December 2013.
This was mainly on account of
• Net statutory reserve withdrawals
• Net Government securities sales
• Net sales of foreign exchange
Weighted lending rates
Commercial banks’ nominal interest rates recorded a mixed performance during the review period. The average lending rate rose to 18.1% in May 2014 from 16.4% in December 2013, following the rise in the BoZ policy rate. However, the 30-day deposit rate for amounts exceeding K20,000.00 and the average savings rate for amounts above K100.00 was little changed at 5.4% and 3.5% from 5.3% and 3.6%, respectively in December 2013.Yield rates on Government securities have however trended upwards, largely reflecting higher Government domestic borrowing. The weighted average composite yield rate for Treasury bills closed 410 basis points higher at 19.4% in June 2014 from 15.3% in December 2013, while the weighted average bond yield rate gained 180 basis points to close at 18.1% from 16.3%.
In terms of the outstanding stock of Government securities, Government Treasury bill marginally declined to K9,881.2 million in June from K9,942.9 million in December 2013, while the stock of Government bonds rose to K10,576.8 million from K9,429.1 million in December 2013. Commercial banks remained the largest investors in Treasury bills with holdings of K6,160.9 million at face value, representing 62.4% of the total bills in circulation as at end June. The non-bank public accounted for 26.9% while the Bank of Zambia holdings stood at 10.8%. In the Bond market, the non-bank public were the largest holders at 53.0% (K5,601.7 million), while commercial banks accounted for holdings of 30.0% or K3,167.4 million. The Bank of Zambia held 17.1% or K1,807.6 million.
Fiscal Policy: Debt Management
For the period from January, 2014, total external debt service (principal plus interest payments) now stands at USD 52.2 Million of which USD 2.6 Million is a payment made in April, 2014. According to Ministry of Finance projections, the total external debt falling due over the next 12 months stands at USD 249 Million or 1.3% of GDP.
For the period from January, 2014, total domestic debt service related to Government securities (principal plus interest payments) now stands at K3.2 Billion of which K544.6 Million is a payment made in April, 2014. In the same month, Government issued K458 Million Treasury Bills in the domestic market. According to Ministry of Finance projections, the total domestic debt falling due over the next 12 months stands at K9.8 Billion or 8% of GDP.
External Sector Developments
Preliminary data shows that Zambia’s international trade performance during the first five months of 2014 was unfavourable. The merchandise trade surplus narrowed by 16.1% to US $271.1 million from US $323.7 million recorded over the corresponding period in 2013. This was largely attributed to a higher decline in merchandise export earnings relative to the merchandise imports bill.
Merchandise export earnings declined by 5.0% to US $4,264.3 million from US $4,488.9 million realized the same period in 2013, explained by a decline in non-traditional exports and cobalt earnings.
During the first five months of 2014, Non-traditional export earnings, at US $1,009.5 million were 30.0% lower than US $1,441.9 million registered during the corresponding period last year. This was largely on account of lower earnings from the export of copper wire, burley tobacco, cotton lint, fresh flowers, fresh fruits and vegetables, gemstones, cement and lime, and maize.
Similarly, cobalt export earnings declined by 23.2% to US $45.7 million from US $59.5 million recorded during the corresponding period in 2013, largely on account of a 37.0% decline in export volumes to 1,725.6 mt from 2,740.1 mt registered the previous year. The realized monthly average price of cobalt, however, increased by 22.0% to US $26,491.91 per ton from US $21,709.42 per ton registered during the same period in 2013.
However, copper export earnings grew by 7.4% to US $3,209.1 million during the first five months of the year from US $2,987.5 million recorded over the same period last year, driven by higher export volumes. Copper export volumes, at 477.485.3 metric tons (mt), were 19.4% higher than 399,919.8 mt recorded during the corresponding period in 2013. The average realized price of copper, however, declined by 10.0% to US $6,720.86 per ton from US $7,471.77 registered during the same period last year.
Meanwhile, the year-to-date (May 2014) merchandise imports bill declined by 4.1% to US $3,992.6 million from US $4,165.2 million registered in 2013. This was due to lower import bills of commodity groups such as industrial boilers and equipment, motor vehicles, chemicals, plastic and rubber products, and paper and paper products.
There was a decrease in the total value of metal exports from K 3,631 Million in January to K 3,458 Million in March 2014.
The overall contribution of metals and their products to the total export earnings averaged 75 percent.
The share of Non Traditional Exports recorded an average of 25 percent in revenue earnings between February and January 2014.
Gross International Reserves
Gross International Reserves (GIR) rose to US $3,387.13 million as at end-May 2014 from US $2,683.8 million at end-December 2013, largely due to the receipt of the second Euro bond proceeds. The level of reserves in May 2014 represents about 3.5 months of import cover as opposed to 3.0 months of import cover in December 2013.
Banking Sector
The banking sector financial performance and condition continued to be satisfactory and stable. As at 31 May 2014, the banking sector was adequately capitalized, with the aggregate capital adequacy ratios at 21.7% and 23.8%, which were well above the minimum requirements of 5.0% and 10.0% for the primary and total regulatory capital, respectively. In addition, the sector continued to post strong earnings
Projections for Third quarter 2014 and Rest of the year
Inflation is expected to edge downwards by the end of the third quarter of 2014. This projection is premised on expected improvement in the supply of various food stuffs as well as the lagged effects of the kwacha strengthening following monetary policy tightening in recent months. However, upside risks include cost push factors emanating from the recent increase in fuel prices and electricity tariffs.
The Bank of Zambia projects an annual growth rate of 6.5% of rebased GDP. We estimate a growth rate slightly higher at 6.8% of rebased GDP on the premise of a rebound in the third quarter driven by the mining sector, construction (especially railways and roads),energy, Agriculture and tourism driven by the 50th Jubilee independence celebrations.
Disclaimer: All speculation given in this article is plausibly deniable.
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