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Zambia forecasts the economy to expand by 3.5% in 2022

February 8, 2022by Nicholas Kabaso
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Local Market Commentary

  • According to Zambia’s 2022-2024 Medium-Term Budget Plan, the economy is forecast to expand by 3.5% in 2022 versus a 3.1% estimate for 2021. For 2023 and 2024, growth is seen at 3.7% and 4.4%. Meanwhile, preliminary estimates show a 3.3% growth rate in 2021 versus a 2.8% contraction a year earlier. Secretary to the Treasury Felix Nkulukusa said that the medium-term budget plan “will focus on stimulating the domestic economy by reducing the budget deficit through the adoption of fiscal consolidation measures and enhanced domestic resource mobilization, rationalizing debt and dismantling domestic arrears while increasing allocations to enhance social sector welfare. ” Note, the growth forecast for 2022 and 2023 are in line with central bank estimates. According to the central bank, growth is expected to be underpinned by strong performances in finance and insurance, information and communication, wholesale and retail trade, as well as mining sectors. That said, new waves of coronavirus infections amidst the low vaccination rate are a key downside risk to the growth outlook.
  • Staying with the Medium-Term Budget Plan, it was reported that the stock of public domestic and external debt increased markedly over the period from 2019 to 2021. Specifically, domestic debt rose from ZMW 53.3bn in January 2019 to ZMW 198bn at the end of 2021. According to the Finance Ministry, the increase over the period largely reflected increasing recourse to domestic financing, as external programme financing was impeded by the high debt levels and debt servicing requirements that resulted in the debt standstill from October 2020 amidst reduced fiscal space.
  • Meanwhile, external government borrowing amounted to $12.99bn at the end of September 2021, mainly due to disbursements on existing project loans. The government’s publicly guaranteed external debt stock was $1.5bn as of the end of September 2021. The bulk of the guaranteed debt relates to state-owned power utility ZESCO.
  • In the way of data, some focus will turn to the U.S. trade balance today that is expected to reflect another hefty trade deficit of more than $83bn. The strength of the U.S. economy and credit cycle as well as the powerful fiscal stimulus package will keep domestic demand strong enough to promote imports. This remains a key constraint to the USD over the longer term, as will the budget deficit unless tackled.
  • Geopolitically, most of the focus continues to rest on Ukraine. France has adopted a more conciliatory approach with French President Macron meeting with Russian President Putin yesterday. The U.S., for its part, has again made it clear that any aggression from Russia will be met with harsh sanctions and the scrapping of the Nordstream 2 project.
  • In the near term, the USD appears to have built a base to regain some lost composure. Clear direction is still lacking, and there is no strong bullish undertone to speak of, but with the VIX also stabilising at slightly elevated levels, there is no obvious reason to be turning bullish on emerging markets unless it was to take advantage of the more attractive yields. For now, the USD looks set to remain supported, although that might change if France’s initiative with Russia proves successful enough to dial down tensions and ease any risk aversion. 

Rand and International FX Commentary

  • The week has started off in a very non-committal fashion. While the ZAR was on the defensive on Friday following the US non-farm payrolls data, it failed to follow through on Monday. Ahead of the domestic inflation data and the SONA, it would appear that investors are not keen to adopt any clear-cut direction. Furthermore, it was a quiet start out of the US, which offered investors very little impetus, one way or another.
  • On a more positive note, commodity prices are on the rise again. That could put some pressure on the USD and assist the ZAR through bolstering SA’s terms of trade. Notwithstanding the rise in the oil price, it is important to note that SA’s terms of trade remain supportive of the ZAR. On a carry attractiveness score, SA ranks 3rd out of 22 countries, in part driven by the terms of trade and the positive influence this exerts on the trade and current account.
  • Less positive is SA’s performance across the resilience framework. It slipped into the bottom half of the twenty-two-country sample, implying that the slippage on the fiscal front could count against the ZAR later this year. Against this backdrop, this month’s budget will take centre stage as investors hope for some signs of reforms that could stabilise the economy and give these investors greater comfort to take advantage of SA’s high yields.
  • So there are conflicting forces at play at the moment, and the cross-currents make it difficult to accurately read. That is neatly reflected in ETM’s ZAR Sentiment Indicator, which is trading back in neutral territory, not favouring any clear cut direction one way or another. Even on the technical front, there is a lack of clear direction which means we could very well enjoy another consolidative week.

Nicholas Kabaso

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