Economic growth in Zambia will begin to recover over the months ahead as improving rainfall raises agricultural output and domestic power supply. We expect that copper mining sector activity will tick upwards, as gradually rising copper prices encourage firms to raise production, and will provide a modest boost to economic activity over the next 18 months.
Headline inflation in Zambia will subside gradually over 2016 and 2017 on the back of increased currency stability and slowly falling food prices. Cooling inflation will allow the Bank of Zambia to move away from hawkish policy in order to stimulate domestic demand.
Zambia's budget deficit will begin to narrow over 2016 and 2017 as the government implements sharp subsidy cuts. While negotiations with the IMF are likely to be delayed by the opposition United Party for National Development's decision to contest election results in the constitutional court, we expect an agreement will be finalised in the months ahead, further supporting debt sustainability.
Zambia's current account deficit will begin to narrow in the months ahead as rising domestic copper production boosts export growth and increased rainfall eases food and power imports. The gradual uptick in financial account flows, as a result of rising foreign direct investment into Zambia, will be more than sufficient to fund this narrowing external account shortfall in the years ahead.
The Zambian kwacha will trade sideways through to year-end and will appreciate modestly over 2017. While elevated inflation will offset improving trade dynamics over the rest of 2016, leading to range bound trade, loose developed market monetary policy will drive capital inflows and will see the kwacha strengthen over 2017.
Social unrest will remain elevated in Zambia in the coming weeks, after Edgar Lungu's narrow win over opponent Hakainde Hichilema in the August 11 presidential elections. While the government will maintain a more investor friendly policy toward the mining sector, we expect that sentiment will only slowly improve in the wake of sclerotic mining sector policy during Lungu's prior term.
Major Forecast Changes
While we had initially expected an additional 200bps of hikes this year before the Bank of Zambia hit the top of the hiking cycle, slower-than-expected economic growth and the Bank of Zambia's move away from hawkish language in its policy statements in recent months have encouraged us to amend our forecast. We now forecast that the bank will keep the benchmark policy rate on hold at 15.5% over 2016 and 2017.
We believe that the government's subsidies cuts as well as gradually improving revenues from the copper sector will see Zambia's fiscal deficit narrow at a faster pace over 2016 than we had initially expected. We now forecast the country's fiscal deficit to 6.6% of GDP over 2016 compared to our previous forecast of 7.8% over the same period.
We have revised our forecast for Zambia's current account deficit from 7.5% and 6.3% of GDP over 2016 and 2017 respectively, to 6.2% and 4.9%. We believe that improving rainfall will temper imports of food and power and will ease pressure on the current account balance.
A sharper than expected Chinese slowdown keeps the copper price in decline, leading to further currency weakness and job losses as more mining companies close operations in the challenging operating environment.
Government expenditure maintains a focus on unproductive areas of the economy, such as public sector wages, while capital spending remains well below the amount necessary to improve the country's underdeveloped energy and infrastructure sectors.
While we expect inflation to subside in the months ahead, as rainfall begins to normalise, price growth will remain susceptible to adverse weather conditions. The country remains reliant on hydroelectric power generation as well as agriculture and a spate of drought or flooding would reduce domestic food and power supply and drive prices upwards.
|e/f=BMI estimate/forecast. Source: National Sources|
|Nominal GDP, USDbn||26.9||21.9||22.1||26.3||30.0||32.5||35.1||38.3||41.7||45.3||49.6||54.4|
|Real GDP growth, % y-o-y||5.6||3.1||3.4||5.2||5.4||5.6||5.6||5.8||5.8||6.2||6.5||6.6|
|Consumer price inflation, % y-o-y, eop||7.9||21.1||17.0||10.0||8.0||7.0||7.0||7.0||7.0||7.0||7.0||7.0|
|Exchange rate ZMW/USD, eop||6.39||11.00||10.00||9.80||10.25||10.56||11.07||11.55||12.03||12.51||12.99||13.47|
|Budget balance, % of GDP||-6.3||-7.7||-6.6||-5.3||-4.2||-3.4||-2.6||-1.9||-1.2||-0.6||0.2||0.9|
|Current account balance, % of GDP||2.2||-3.5||-6.3||-4.9||-3.3||-1.8||-1.4||0.1||0.7||0.5||0.8||1.2|
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