Tafara Mtutu Investment :Analyst
Zambia recently made headlines when holders of the country’s US$3 billion Eurobonds rejected the government’s request to delay interest payments on the debt instrument. The rejection inadvertently saw the Zambian kwacha depreciating by 41,9 basis points against the United States dollar since the news made headlines.
However, it is also interesting to note that since the year started, the kwacha has lost 42,5% of its value against the US dollar. The reasons behind the rejection and currency depreciation also point to deeper issues within the country’s economic fundamentals and one cannot help but draw parallels with Zimbabwe’s economy.
The first point of concern was a lack of communication and transparency within the country. Eurobond holders argued that there are illicit financial flows and opaque debt, with specific regards to one of its state-owned enterprises (SOEs) called Zesco.
Zesco is Zambia’s state-owned power utility company that accounts for over 45% of Zambia’s external debt. These issues are too close to home given that Zimbabwe’s state-owned power utility Zesa Holdings recently cleared its US$33 million external debt to South Africa in March of this year and is still working towards clearing its debt with Mozambique’s HCB amounting to US$35 million.
In addition, the 2020 Fiscal Transparency Report, that was compiled by the US government, also criticizes both Zambia and Zimbabwe for being largely opaque on government policies, operating procedures, expenditure and sources of revenues.
Zambia’s case of opaque debt within SOEs such as Zesco also highlights the failures of the government to efficiently run its SOEs. Zambia currently has 32 SOEs and only 17 of them are profitable.
Similarly, Zimbabwe has 107 SOEs which contribute only 2% to Zimbabwe’s GDP and have been another cause of concern with talks of privatising a few of these, namely the Infrastructure Development Bank of Zimbabwe (IDBZ), Zupco and Agribank, have been tabled by the Ministry of Finance and Economic Development’s Transitional Stabilisation Programme (TSP).
Similar to Zambia’s external debt overhang of US$9,4 billion, Zimbabwe also has high external debt of US$11 billion which it is struggling to clear, as evidenced by over 70% of this external debt being in arrears, and this is despite the proposed US$3,5 billion debt instrument meant to provide the necessary funds to compensate dispossessed white farmers.
Further to that, high credit risk was pointed out on the back of allegations of graft, misappropriation of funds and poor audit results on project loans. These issues are aptly quantified by the country’s consistent fall from grace with top credit rating agency Standard & Poor, who have been downgrading Zambia from B+ in 2011 to CCC- (junk bond status) last month. In layman’s terms, this means that lenders’ confidence in Zambian entities has waned, and that higher-than-normal interest rates will be required to compensate any lender for the risk that is in the southern African country.
Zimbabwe’s sovereign credit risk is also C-rated, and the high credit risk continues to sour relationships between the country and the international lending community. These two countries are both expected to have unsustainably high debt-to-GDP ratios which will subsequently place pressure on growth prospects in the forthcoming years.
Given these parallels, it warrants further analysis of Zimbabwe’s economic relationship with Zambia, specifically through trade.
According to the United Nations International Trade Statistics Database (Comtrade), Zimbabwe exported goods worth US$59,6 million to Zambia in 2019. A compromise in the value of these exports could dent the investment case for companies with extensive exposure to the Zambian economy such as Delta Corporation, ART Corporation and Axia Corporation.
These companies, while headquartered in Zimbabwe, have increasingly sought to diversify operating risk and increase their customer base by expanding into the region, but Zambia exhibits shaky fundamentals that now question the above-mentioned entities’ investment thesis into the neighbouring country. They stand to lose a significant chunk of the real value of their investments through weakening macro-economic fundamentals and a depreciation of the kwacha.
Delta is one of the largest alcoholic and non-alcoholic beverages manufacturer in Zimbabwe and it has a controlling stake in Zambia’s National Breweries, one of the largest breweries in the country with a market share in excess of 80% and market capitalisation of ZMK580,23 million (US$28,92 million).
ART, a diversified company that taps into the energy, agriculture and hygiene sectors of Zimbabwe, owns Chloride Zambia, one of the largest automotive batteries distributor in Zambia, with its Exide brand taking centre stage in its portfolio.
Axia, the retailing giant with TV Sales & Home and Transerv under its belt, also operates the Distribution Group Africa subsidiary which has operations in Zambia that are extensively involved in warehousing, logistics, marketing, sales, and merchandising services.
The companies still stand to register positive, albeit weaker, performance from their respective Zambian subsidiaries after converting their earnings from the kwacha to a relative stronger US dollar figure.
The weakening kwacha, in essence, has already begun slightly offsetting these entities’ gains from their operations in Zambia. The impact is currently marginal given that the Zimbabwean dollar has lost 77,8% on the same period that the kwacha has lost only 42,5%, with the net effect has been positive for these entities in 2020.
However, with signs of currency and price stability in Zimbabwe amid Zambia’s possible economic deterioration, the tables could turn in 2021 for these companies. It would be interesting to keep an eye on how the management of these companies will manoeuvre the rough terrain ahead.
Mtutu is an investment analyst with Morgan & Co. He writes in his personal capacity.