GDP growth: getting there, slowly
We expect GDP growth to expand by 4.4% y/y in 2018 and 4.9% y/y in 2019, underpinned by a recovery in the mining and agricultural sectors. However, due to a rather slow pick-up in economic activity as well as a downward revision to H1:17 growth, we now expect the economy to grow by 3.5% y/y, from our previous 3.8% y/y estimate.
The broader concern for the government remains the diversification of the economy. Private investment needs to be accelerated towards sectors such as manufacturing, tourism and Information Communication and Technology to ensure that the economy can show more resilience to domestic and external shocks.
Balance of payments: minimal risks
We see the C/A deficit falling to 1.8% of GDP in 2018, from an estimated 3.6% of GDP in 2017, premised on our view that the government will scale back its capital expenditure to appease the IMF, while exports of copper should remain robust, and prices high.
Imports of consumer goods grew at a slower pace (43.8%), and could continue this modest growth over the coming year as private sector credit (PSC) growth remains weak. On the other hand, if the government delivers on its promise for fiscal consolidation over the next two years, imports of capital goods should remain restrained.
While the rise in global oil prices does not bode well for the import bill, copper prices are also likely to remain elevated for the next few years. Additionally, the increased rainfall should reduce the government’s reliance on importing diesel for power generation, as the hydropower dams should be replenished adequately. Rising domestic demand, which could increase imports, will probably lead to a higher C/A deficit of 2.3% of GDP in 2019.
FX outlook: not too gloomy
We expect the USD/ZMW to drift higher to levels around 10.8-11.1 at the end of December 2018. Arguably, since foreign investors account for around 16.9% of the total stock of domestic debt, the ZMW remains at risk of volatility. However, even though investors could be focused on Zambia’s fate with the IMF on a potential program, this may not be enough to exert durable upward pressure on the USD/ZMW. Indeed, real yields remain elevated, domestic demand is soft, and the recovery in PSC growth is likely to be modest.
Monetary policy: credit growth focus
We expect the MPC to cut its benchmark rate by 25 bps in H1:18, to 10.0%, to further boost private sector credit growth. Declining inflation and weak domestic demand prompted the MPC to lower its policy rate by a total of 525 bps in 2017.
In addition to the ZMW liquidity constraints, there are notable deficiencies in domestic demand, which would have to turn around for PSC growth to pick up durably on a multi-month basis. We see this happening gradually only from the end of H2:18. Headline inflation could have bottomed out, but we expect it to broadly remain within the government’s medium-term target range of 6.0%-8.0% y/y in 2018, although second-round effects from power tariff hikes, coupled with higher transport costs, could exert upward pressure on core inflation in H1:18.