Zambia’s Political Quagmire could recede the ‘Copper Producer’ into a Sovereign rating downgrade

ZAMBIA, Africa’s second largest copper producer could be at brink of a credit downgrade with the rating agencies. The southern African nation has been caught up in a political quagmire characterized by firing of its Minster of National Planning and Development Honorable Lucky Mulusa and resignation of its Ministry of Foreign Affairs Honorable Harry Kalaba in a space of less than a week. Zambia’s former foreign affairs minister posted on his social media page that he had resigned and that he had made this decision in the interests of citizens which he decided to put before party needs. The current ruling party Patriotic Front has been facing infighting which has resulted in expulsions and resignations in government. Harry Kalaba is one of the few Ministers to have resigned out of free will after the likes of the late Levy Mwanawasa (MHSRIP) who stepped down as Vice president in 1994.

“We can no longer hold our arms in silence and watch the impunity of those that make the essence of governing a mockery,”  Harry Kalaba was quoted.

There is need to understand the linkage between politics of a nation and how its instability would transmit to impact macroeconomic indicators. Financial markets are elastic to  political risk factors especially that investors would be asking ‘why are ministers exiting or being axed in such a short space’.

Zambia is at a critical point in its sovereign cycle and as the political quagmire plays out, multilateral institutions are watching – key of which are the International Monetary Fund – IMF. Zambia is in talks with the IMF for a $1.3billion bailout package. It is key that for this to successfully play out the political risk environment needs to be of an acceptable standard as ultimately the climate reflects the state of the space that business players and investors will operate in. The leadership lacuna created in the last one week have the potential to make investors ‘nervous and jittery’ and would cause financial asset sell offs which would result in pressure on the Kwacha and low appetite for Zambian paper – bills and bonds. What has played out over the last one week has the potential to unsettle investors and keep them on the fence thereby resulting in withholding of key investments that could penalize the nations growth.

Ratings agencies in Q3:2016 warned of political risk factors earning  the nation a downgrade post the ‘threatened state of emergency’. A rating downgrade is the last thing the nation needs after most macros outperformed in 2017 and political risk factors creating leadership vacuum could recede all the gains the nation has attained to date. The IMF, World Bank, bond holders and investors are all watching this space and if the current leadership doesn’t address infighting in the party the autopsy of the tension could extend to the financial markets. A leaf could be picked from our Liberation struggle partners South Africa on how just the finance ministry reshuffles were the genesis of a rand volatility which then translated ion asset selloffs that earned Africa’s best financial market a junk status downgrade. South Africa is still grappling with political risk factors which have still continued to weigh that nations growth pattern. The political risk quagmire has potential to widen credit rating (Z) spreads to push Eurobonds yields higher than currently though this will likely be offset by higher copper prices as commodities seem to drive dollar debt pricing more than anything.

Zambia’s current credit rating is ‘B’ with negative outlook on Standards and Poor’s and ‘B-‘ with stable outlook with Moody’s and Fitch. A political quagmire could just attract a rating review to deteriorate the nations sovereign standing which risks putting the nation in bad stead with multilateral institutions such as the World Bank, IMF or AfDB.

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