AMR: Zambia
We expect GDP growth of 1.92% y/y in 2022 and 2.81% y/y in 2023. We expect that the C/A surplus to reach 7.42% of GDP in 2022 and 7.69% of GDP in 2023. We see the pair USD/ZMW around 16.6 at year-end.
Population
18.90million
Nominal GDP
USD 21.8billion
Real GDP growth
3.55%
CPI
22.08%
GDP growth – downside risks still dominate
We maintain our GDP growth forecast at 1.9% y/y for 2022 and 2.8% y/y for 2023, from 3.6% y/y in 2021. However, downside risks still dominate, with high and still rising global food and oil prices likely to constrain the economic recovery. Buoyant copper exports should still support net exports though. Poor rainfall might now hamper cereal crop production after the bumper 2021 harvest. Furthermore, the rising cost of fertilizer would limit the reach of the government’s Affordable Inputs Programme (AIP), which too would weigh on crop yields.
Balance of payments – C/A surplus should narrow as import bill rises
We see the C/A surplus narrowing to 7.42% of GDP by end 2022, from 10.78% (or USD2.35bn) by end 2021. However, we expect the current account to remain in surplus, reaching 7.69% of GDP by end 2023. Foreign portfolio investment inflows in the local debt market slowed in H2:21. Though Zambia’s progress on debt restructuring is encouraging, though slow, FPI participation will likely continue at current levels.
Monetary policy – hiking cycle imminent
We expect the MPC to increase the policy rate by at least 100 bps, taking the key policy rate to 10.0% in the next 12-m. Unwinding base effects have kept headline inflation contained this year, moving closer to the BOZ’s medium-term target. The BOZ maintains that average inflation should fall into its 6% - 8% target range by 2023. However, to restrain inflation expectations, we expect the MPC to start hiking rates in H2:22.
FX outlook – some improvement in onshore FX liquidity
We see USD/ZMW reaching 16.96 at end Q3:22 and 16.6 at end Q4:22. Though onshore FX liquidity conditions have been improving this year, liquidity will likely remain intermittent because BOZ intervention tends to be irregular. We maintain that FX interbank market inefficiencies predispose the ZMW to sharp swings. Our bear case models a more aggressive depreciation of the currency following delays in disbursements of IMF funding and less intervention from the BOZ. Our bear case puts the USD/ZMW pair at 25.43 by end 2022 and 24.18 by mid-2023.
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