Saturday, November 1, 2008

Zambia's good times could be at an end

By Justine Gerardy, Business Report, October 28, 2008

Before president Levy Mwanawasa's stroke in late June, Zambia was riding an economic high powered by record prices for copper, the country's main export.

His successor, who will be elected Thursday, faces a less rosy scenario as copper prices have tumbled by 50 percent from their peak in July, raising fears that the good times are ending in a country struggling to lift itself from poverty.

"Whoever comes into power is going to face some very real challenges," Leon Myburgh, a Citigroup analyst who studies sub-Saharan Africa, told AFP

The global commodities boom had allowed Mwanawasa to build up foreign reserves to an all-time high of $1.1 billion (R11.7 billion), while stabilising the value of the kwacha currency and pulling inflation down to 10 percent.

But now the global financial crisis is causing worries even in the world's poorest countries like Zambia.

Banks here have few international assets and are generally not affected by the credit crunch, but the resulting global slowdown has dramatically cut demand for raw materials, sending prices into a tailspin.

With some of the world's largest copper reserves, the metal accounts for 80 percent of Zambia's export earnings.

That means every swing in the value of copper can have dramatic knock-on effects for the value of the national currency, which in turn could spark higher inflation.

Economists say that Zambia's new president will need to diversify to offset dangers of currency fluctuations and falling tax revenues as its export value falls.

"The demand for copper has dropped and the price has gone down, and it's impacting on the kwacha's value," said Chibamba Kanyama, of the Economic Association of Zambia.

"A huge depreciation of the exchange rate will cause general price instability, which is inflation, and that is not good for investor confidence," he told AFP.

The central bank last week cut growth projections to six percent, citing the kwacha's volatility amid the plunging copper prices, foreign investor withdrawals and increased uncertainty around the elections.

Mwanawasa's prudent economic policies have so far sheltered Zambia from the worst of the global economic storm, said Bongani Motsa, senior economist at Pan-African Capital Holdings in Johannesburg.

"What Zambia needs now is somebody who will carry on where Mwanawasa left off," Motsa told AFP.

Acting president Rupiah Banda, who took over following Mwanawasa's stroke, has assured investors that he would continue the policies that made Zambia one of Africa's most stable countries.

In a thinly veiled dig at main opposition leader Michael Sata, who two years ago swore to boot out the country's sizable Chinese investors, he has also publicly welcomed foreign investors.

Sata now says he's willing to work with the Chinese, but has raised dust with a campaign promise to force companies to hand a 25 percent equity stake to local investors.

Banda has denounced his statements for "undermining investor confidence."

But he has also turned to the vote-friendly power of social assistance, slashing fertiliser prices by 75 percent while on the campaign trail.

Talk by both candidates of spreading Zambia's mineral wealth more evenly has great resonance in a country where more than 60 percent of the 12 million people are living on less than two dollars (about R21) a day.