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AMR: Zambia

AMR: Zambia

We expect GDP growth of -5.0% y/y in 2020 and 0.6% in 2021. We expect that the C/A surplus to reach 2.7% of GDP in 2020 and 2.1% of GDP in 2021. We expect the pair USD/ZMW to reach 21.5 by year end.

Nominal GDP
Real GDP growth

GDP growth – clouded

Growth seems set to remain weak in the medium term. The uncertain outcome of the pandemic will weigh on the immediate growth outlook. The tourism, wholesale and retail trade, and construction sectors face the most damage for the foreseeable future. Critically, fiscal rebalancing could stall any economic recovery.

Balance of payments – under extreme pressure

Notwithstanding external pressures, FX reserves appear to have stabilized between USD1.20bn and USD1.50bn. Government demand for FX has been the primary source of pressure on FX reserves for some time now. Most of this demand has been for meeting external debt service commitments. Therefore, the sooner the external debt restructuring is finalized, the sooner FX requirements will moderate, thereby easing the pressure on FX reserves.

At end Q2:20, the C/A surplus had narrowed to 1.3% of GDP, from 2.8% of GDP at end Q1:20. Notwithstanding global trade disruptions in that time, copper and agricultural exports performed well

Monetary policy – greater bias for easing

Following the abrupt change in leadership at the BOZ, there may be a greater bias for further monetary policy easing now. This unexpected leadership change comes in a pre-election year and against the backdrop of mounting public funding pressures. The market now questions whether the government could either pressurize the BOZ to monetize its deficit or lower the policy rate further.

FX outlook – ZMW set to weaken further

Upward pressure on the USD/ZMW is likely to intensify; we see the pair near 21.5 by year-end. USD inflows into the interbank market have been sliding, and, in addition to royalties, mining companies have also begun paying their taxes directly to the government in USD. This incurred FX liquidity shortages onshore at the end Aug 20.