Zambia Country Risk Report Q4 2018
While rising borrowing costs due to higher sovereign bond yields will continue to put pressure on the Zambian government to pare back spending, we think that structural constraints will undercut fiscal consolidation efforts.
As the government tries to raise fiscal revenues in a bid to maintain elevated levels of expenditure, we see increased risks to the business environment, especially for the copper mining sector.
Only slowly rebounding economic activity in the non-mining sectors of the economy will prevent the Bank of Zambia (BoZ) from reversing its monetary policy direction in 2018. That said, risks are skewed to the upside. Rising food and fuel prices will keep inflation near the upper band of the BoZ's 6.00-8.00% tolerance band, while investors' concerns regarding Zambia's fiscal sustainability might weaken financial inflows in the country, increasing economic pressure on the BoZ to raise interest rates sooner than expected.
Rising debt servicing costs and a failure to cut the sizeable public sector wage will weigh on Zambia's ability to enact significant fiscal consolidation in the coming quarters. Recent allegations that the country may have far more external debt than is being reported will only further exacerbate Zambia's fiscal woes, undermining investor sentiment and ramping up borrowing costs.
We have revised down our forecast for 2018 GDP growth from 4.2% to 3.9% and our forecast for 2019 GDP growth from 5.3% to 4.5%.
We have revised up our forecast for Zambia's budget deficit to average 7.8% and 6.9% of GDP in 2018 and 2019 respectively, from 7.1% and 6.4% previously.
We have revised up our forecast for the monetary policy rate to increase by 100 basis points in 2019 due to concerns about inflation and the currency. In our previous view, we expected the BoZ to keep rates unchanged at 9.75%.
We have slightly revised upwards our forecast for the kwacha, now expecting the unit to average ZMW10.24/USD in 2018 and ZMW10.70/USD in 2019, up from ZMW10.09/USD and ZMW10.40/USD.
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