This week, ZANACO released the 2019 Economic Review Report. Of much interest to me is a graph that depicts the performance of the Kwacha each time there was (adverse) sentiment about the country. In April/May, 2019, Bloomberg published a story, ‘Zambia pulling a Mozambique style hidden debt’. The exchange rate moved from K9.5/US$ to K10.3/US$. Shortly afterwards, after much market pushing (which saw the Eurobond performance break a new threshold), the Minister of Finance at the time, Margaret Mwanakatwe, released a statement of debt management. The market read this as positive news and the Kwacha appreciated to K9.8/US$.
Then came the China-buying-ZESCO story by Africa Confidential in September 2018. The Kwacha immediately traded at K12.5/US$, causing much panic in government. Government did not anticipate the story and failed to effectively dismiss it. The impact was felt for the entire month of September 2018. However, between October 2018 and April 2020, the country did not experience significant adverse news and the market was happy to experience some relative stability in the exchange rate, the Kwacha trading on an average K11.9.
In April-May this year, the International Monetary Fund, whose projections are closely followed by watchers and investors in Zambian securities and the Eurobond, cut the growth forecast to 2.2 percent for 2019. This was against government’s own projections of 3.8 percent of GDP. This, plus debt and weather concerns, caused some panic trading, the Kwacha trading at K14/US$. To reverse the free-fall of the Kwacha, Government made a very quick (verbal) reaction by announcing austerity measures. The Kwacha gained by trading at K12.4/US$. This was only negatively affected by the downgrading of Zambia’s sovereign rating (plus general excess demand of the Kwacha) when the Kwacha again depreciated to K13.1, the rate it traded at between July and October 2019.
What has suddenly happened? I would say the first part of the current depreciation was induced by a variety of factors: debt servicing, importation of energy, seasonal imports and speculative behavior. However, the most recent depreciation, which has seen the Kwacha break the psychological barrier of K15/US$ is induced by sentiment. Three things have happened within a week.
First, the market has been waiting for some very important news from Cabinet which, I understand, has not come. Early last week, I received an email from one of the investors based in the USA who probably got wrong communication about the much anticipated cabinet meeting on debt, ‘Chibamba, have you heard anything about yesterday’s cabinet meeting? When we were in Lusaka there was a lot of talk that they would present the cancellation/delay of pipeline projects.’ In other words, investors, uncertain about Zambia’s debt sustainability challenges, follow every piece of news about Zambia very keenly and when they don’t get it, they interpret it as ‘problematic situation.’
Second, the United States Ambassador to Zambia Daniel Foote made two critical statements in his recent press briefing that signalled a big problem. He said, ‘However, like the lack of public information made available on Zambia’s debt acquired over the past few years, the government has chosen not to share this vital data with its citizens…’ By implication, Mr. Foote was saying the debt position declared by government is not true. I presuppose this was interpreted adversely by investors. The last line of the same press statement read, ‘I hope the government of Zambia commits to improve its decaying relationship with the United States…’. Was it not just a few weeks ago the Minister of Finance Bwalya Ng’andu was assured by the US Treasury that the latter would support a deal with the IMF? What is this now?
Third, the Mukula tree story has had significant traction international over the past two days and I am not sure how government is dealing with it. It is on this cue I make my conclusion on the way forward: One area government is wanting is how to react to adverse sentiment. I did share with Mrs Margaret Mwanakatwe at the time she was Finance Minister that the Eurobond factor implies a change of strategy on how we pacify the jittery market. One solution would be to engage reputable international advisors who are perceived to be credible by investors to be the third-party communicators on behalf of government. I also suggested she needed to go to the market with authentic data as much as she could, particularly on debt. She heeded the advice by constantly releasing data from October 2018 till she was fired. The strategy somewhat worked.
Another approach now is for government to engage a very strategic, emotionally balanced communicator. I have in mind the Zambian Ambassador to the African Union, Emmanuel Mwamba. He has one advantage: he engages in debates very strategically and does good research when reacting to issues. I am not sure where to position him but maybe at Cabinet Office in equivalent position. He is the nearest in government I can think of capable of engaging diverse external stakeholders in a ‘seek-to-learn-and clarify’ manner.
When government is daily facing adverse sentiment, you need a very level-headed communicator for external stakeholders. The individual should have enough authority to help government put its house in order because you cannot sell what you do not have. Effective communications start with a reality check: Is there something that needs fixing so that adverse sentiment does not have breeding ground?
By Chibamba Kanyama