Self-inflicted damages worsen metals downturn for Africa

IN Southern Africa, severe drought conditions, a drop in commodity prices, and increasing pressure on the state purse have hit key mining economies. Some of the pain has been self-inflicted, however.

Zimbabwe, where a succession battle in the ruling Zanu-PF is increasingly playing out in public, and Zambia, where presidential elections will take place this August, have seen increased political risk.

In Mozambique, one of the fastest-growing countries in the world in recent years, the discovery of vast natural gas deposits has fuelled renewed tension between Frelimo, the ruling party, and Renamo, its main opposition.

The promise of vast gas-driven riches in future has also led the Mozambican government to the international debt markets, and $1.4bn in previously undisclosed public debt that came to light in April have hurtled the economy into crisis.

Donors and the IMF have withdrawn funding, the metical has dropped against major currencies, inflation is rising and government’s reserves are getting depleted, increasing the likelihood that the country may not only default on its loan obligations this year, but also civil servants’ salaries.

The hidden Mozambican debt, which included a loan of $850m earmarked for the purchase of tuna-fishing boats, but actually spent on naval vessels and security equipment, is an example of the political expediency often seen in the region.

“Questions were raised about the deal at the time and it was flagged as a potential issue, but the government just went ahead and did it anyway. The focus was on the short term to address the security needs, rather than investing in the fishing industry and developing a key natural resource,” said Dianna Games, CEO of business advisory [email protected]

“You see these kinds of problems in a number of countries where governments are not focused on the right priorities,” she said.

Zambia, where the drop in copper prices contributed to its currency nearly halving in value last year, is another example of not getting the priorities straight.

The country is reliant on hydropower from Lake Kariba and the Zambezi river, and the severe drought has caused a major power shortage in Zambia.

“The situation should ease by the third quarter of the year, but what long-term plans do they have to deal with this? It is a reflection of government failure that there are no concrete plans in place to address the power problems,” said Gary van Staden, analyst at NKC African Economics.

ELECTIONS

Elections are looming in August, and investors are also skittish about possible tax and regulatory changes.

With 70% of Zambia’s export earnings derived from copper, one would suspect the government would tread carefully around the mining industry. Yet incumbent president Edgar Lungu, who took power after elections in January 2015 following the death of Michael Sata, changed the mineral royalty tax regime a number of times last year.

For open-pit mines, for example, it increased from 3% to 6%, then to 20% before being lowered to 9%. The flip-flopping created uncertainty and put thousands of jobs at risk.

It has also increased the country’s political risk profile ahead of the August elections. While the two main parties – Lungu’s Patriotic Front (PF) and the main opposition, the United Party for National Development (UPND) – don’t differ substantially in their macro-economic policy views, it is the ‘likely tweaks’ post-election that investors are concerned about, said Van Staden.

“If the Patriotic Front wins, people expect more of the same. It’s not great, but at least it’s a government you know,” he said. “If the UPND wins, you just have no idea what they’re going to do. Any shrewd investor will back off and wait.”

The elections seem too close to call, and the poor state of the economy – at the time of writing, the repo rate was at a record high of 15.5%, and inflation averaged 22.2% year-on-year in the first quarter – will likely play into the hands of the UPND.

“In the short term, the country won’t fall apart, but it will struggle. The prognosis is a lot better in the long term,” said Van Staden.

COMMODITY CRUSH

Lower commodity prices have been hurting foreign exchange and tax earnings, and with foreign direct investment declining, governments’ balance sheets have been under immense pressure, prompting ratings downgrades in Zambia and Mozambique. It has also forced Zimbabwe, which effectively abandoned its own currency in 2009, to limit cash withdrawals and start printing its own version of the US dollar.

Zimbabwe’s bond notes, which are rated at par with the US dollar, are expected to alleviate a severe cash crunch. But it has brought back uncomfortable memories of the reckless money printing that eventually led Zimbabwe’s hyperinflation to peak at 79 600 000 000% shortly before the Zim dollar was abandoned.

The country’s liquidity crisis speaks to the weakness of the economy, including the mining sector, which is a key forex revenue generator, said Games. The aim of the bond notes is to increase economic activity internally, and to prevent unrest which could, for example, be prompted by the non-payment of civil servants.

The country has faced serious crises before, but not “with such a divided ruling party and so few ideas on how to proceed”, said Van Staden. “The country is going to need clear heads if sanity is to prevail, but clear heads may be in short supply.”

They keep changing the investment framework and rules to try and get more and more out of the mining sector

With the next presidential elections earmarked for 2018 and the succession battle in Zanu-PF heating up, political risk will stay high. For the mining sector, the liquidity problems in the economy, along with the continuously changing rules around indigenisation, remain key issues.

“They keep changing the investment framework and rules to try and get more and more out of the mining sector,” said Games. Investors should also expect conflicting policy messages from government ministers, Games said.

On the positive side, the liquidity problems have prompted Zimbabwe to work with the IMF and commit to much-needed reforms, and a successful debt rescheduling would open up external financing, which would help alleviate the liquidity challenges, she said.

While the slowdown has forced Mozambique, Zambia and Zimbabwe to go cap in hand to the IMF for bailouts, Botswana, which has been hurt by lower diamond prices, has been able to maintain its investment-grade credit ratings.

This is mainly thanks to low public debt levels (around 15% of GDP), and a rich sovereign wealth fund, whose net assets are estimated at more than 35% of GDP, according to Moody’s.

The key risk factors, the ratings agency said, include its high dependence on the diamond industry for economic growth, fiscal revenues and export proceeds. Its economy is also hampered by very high unemployment, inequality and HIV rates.

BMI Research, which is part of the Fitch Group, also warns that Botswana’s huge reliance on imported energy and food makes it susceptible to any unexpected increases in global food and oil prices. In addition, the country’s uncertain energy supplies have been exacerbated by the current drought affecting the region.

There will no quick recovery from 2015’s commodity price shock, and African economies will face a much less hospitable external environment, warned John Ashbourne, Africa economist at Capital Economics.

Governments will have to tighten fiscal policy to help stabilise government debt levels, and reduce imports in order to cut current account deficits, he wrote in a recent note.

Tighter global monetary policy and reduced optimism – towards emerging markets in general and Africa in particular – may limit the region’s ability to borrow on international markets, and this will also make it increasingly difficult for economies to finance their wide current account deficits, he said