From this October’s Business Diary Botswana:

Zambian President-elect Michael Sata’s recent victory over former President Rupiah Banda and his ruling Movement for Multiparty Democracy (MMD) ended two decades of MMD power while concurrently creating a cloud of uncertainty not only for Zambia’s mining industry, which per the World Bank accounts for roughly 70 to 75 percent of the country’s export earnings (albeit only about 10 percent of its tax revenue), but also those supporters of Sata’s Patriotic Front (PF) party who, having been sold a seductive slogan of “more jobs, less taxes and more money in your pockets” may be in for a rude awakening.  Even prior to the hotly contested race, which culminated in a peaceful transfer on September 23rd during an inauguration ceremony in Lusaka, some pundits opined that the 74-year old Sata (formerly a minister in Kenneth Kaunda’s United National Independence Party which ran Zambia from independence in 1964 until its defeat in 1991, at which point he joined the MMD for its first decade of governance) would in practice stray from the provocative, populist platform he so ardently promulgated.  Per The Economist, for instance, in reality “the policies of [Messers Banda and Sanda] look much the same”, an increasingly popular stance among observers predicated not only on perception but also an acknowledgement of the Zambian economy’s precarious reality—namely the vulnerability of its balance of payments to copper prices (see copper spot’s technical analysis, inset).

The lion’s share of Sata’s campaign gusto centered around the premise of redressing the country’s chronic economic imbalance, a pitiful phenomenon whereby one of the continent’s historically richest countries, previously known as Northern Rhodesia while under British Rule until 1964, ultimately became one of the poorest in the following decades “largely as a result of nationalization, mismanagement, plummeting copper prices and soaring debt”.  And while burgeoning BRIC demand eventually provoked a newfound price paradigm for natural resources—most importantly for Zambia, China’s copper consumption grew from about 1.8 million metric tons in 2000 to nearly 5 million metric tons in 2008, trebling China’s share of global consumption in the process—“most Zambians have personally yet to enjoy their new-found prosperity [as] around two-thirds of them, mostly subsistence farmers, still live on less than $2 a day” (in fact, Zambia’s GDP per capita of USD1,300 is well below the median of USD2,960 for similarly rated countries, per S&P, a ratings agency).  Along with an aim to create more jobs and redistribute the country’s wealth, Sata thus vowed to revisit a 25 percent windfall tax on mining revenues that Banda had previously abolished in 2009.  In that interim, Sata reminded his base (a contingent built largely around metropolitan areas and particularly the legions of disenfranchised youth), copper prices had increased from around $3,000/ton to nearly $10,000 to the benefit primarily of Chinese-owned firms, many of whom it is alleged routinely flout domestic labor laws (to say nothing of at least two purported criminal cases of protesting employees being fired upon by their superiors) while paying “slave wages” with Banda’s implicit approval—a Faustian deal of sorts critics claim involved kickbacks.  Undeniably, China’s influence in the country runs deep.  As the Financial Times noted in January, not only have Chinese companies zeroed in on Zambia’s copper and coal reserves, but they have also staked a growing presence in manufacturing and agriculture.  To that end, the Zambian Development Agency reported this year that in a country with an annual gross domestic product of just $13bn, China alone has injected more than $1bn.  Yet the paradox of such largesse creates friction.  “The more we keep the Chinese out, the more we will stay impoverished,” lamented Sebastian Kopulande of the country’s International Trade and Investment Center.

Zeroing in on the mining sector and its role in a perceived larger sphere of corruption, Sata underscored the lack of transparency in the industry and the need for, at the bare minimum, enhanced audits in order for the Zambian Revenue Authority to more efficiently assess its tax owed.  Mounting evidence suggested, Sata stated, that under an industry practice known as “transfer pricing” (whereby subsidiaries of the same company were said to be trading with one another at “arm’s length” in order to theoretically shift profits more efficiently and thereby minimize tax liabilities) the bulk of Zambia’s copper exports, though destined for Switzerland (more than 85 percent of asset portfolios for sub-Saharan Africa pass through tax havens such as Switzerland, home to firms such as Glencore International AG, a leading integrated commodities producer and marketer) never actually arrived at the assumed destination, per Swiss customs data.  And according to one news report, a leaked memo authored by Grant Thornton, a consultancy, at the request of the Zambia Revenue Agency (ZRA) highlighted that the pricing structure for Swiss copper, though “remarkably similar to Zambia’s exported copper”, was nevertheless “six times higher than the funds Zambia received, facilitating a potential loss of some $11.4bn,” nearly the whole of national annual output.

Yet despite Sata’s initial pledge to tackle said opacity, many remain skeptical his ascendance will result in meaningful change given an ever-murky backdrop of slowing global growth and a violent commodity unwind triggered largely by China’s slowdown.  At September’s end, for instance, Shanghai’s Composite Index hit its lowest point since July 2nd, down more than 14 percent this quarter.  Meanwhile copper prices, which at the beginning of July stood “within striking distance of record highs” per The Wall Street Journal, slid by 25% in September alone, while Barclays Capital cut its copper price forecasts to reflect “weaker-than-expected economic activity during the second half of this year, as well as in 2012” (while admitting, however, that “the weak supply picture . . . should help to buffer the downside”).  With this in mind, many analysts do not expect Sata to rock the boat, so to speak, any more than necessary, if at all.  “The risk is that he is coming in at exactly the moment when global commodity prices may have just gone into reverse and we have seen before, including in Zambia, that when prices are falling it becomes much easier for investors to pressure the government to relax transparency,” noted Alex Cobham, chief policy adviser for UK-based charity Christian Aid.  In the meantime both industry and country-wide investors sit in lurch, given the metal’s importance to Zambia’s overall macro well-being.  Yet currency markets seem to suggest that a pragmatic outcome indeed looks most probable.  While the Kwacha fell from 4,810 to 5, 150/$USD during the week of, and immediately post-election, it has since largely recovered.  Moreover analysts point out that given Zambia’s purported mission to ultimately issue a USD500mn eurobond in order to finance infrastructure expenditure (mainly in the transport and energy sectors), it is likely to tread cautiously with the very industry it hopes to help it double copper production within 5 years, less international capital markets, already shaken by the recent global macro developments, become even more reticent.

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