Copper Mine Suspensions Threaten Zambia’s Growth and Fiscal Position

Lusaka, Zambia, Capital Markets in Africa — Glencore International AG (Baa2 negative) recently announced that it would suspend operations at its Mopani Copper Mine in Zambia (B1 negative) for 18 months. Glencore’s suspension follows a recent decision by China’s Luanshya Copper Mines plc to interrupt operations at its Baluba mine in Zambia. Reduced copper production is credit negative for Zambia because it will depress growth, export proceeds and royalties, further pressuring the sovereign’s increasingly precarious fiscal and external positions. 

Glencore’s operations in Zambia constituted just over one quarter of the country’s total 2014 copper output. Zambia’s growth prospects already face challenges from subdued global copper demand, depressed copper prices, which we expect to persist, and drought-induced electricity shortages. Just a week before Glencore’s announcement, Zambia’s Ministry of Finance reduced its 2015 real GDP growth forecast to 5.0% from the 7.2% growth expectation in the October 2015 budget. The suspension of some mining operations now introduces downside risk to these revised growth projections. Zambia’s growth, which averaged at more than 7% per year over the past decade, is now at risk of falling to the Sub-Saharan Africa median of  5%.

Although copper production contributes only about 10% of total value added, it generates more than two thirds of export revenues and, under a new tax regime in Zambia, about 20% of tax revenues, or the equivalent of 3% of GDP. Lower growth and tax revenues will negatively pressure the government’s already rising budget deficit and debt levels, continuing a trend of missed fiscal targets that were among factors behind our 29 May decision to assign a negative outlook.

We estimate that next year’s fiscal deficit will widen by an additional 0.75-1.00 percentage points of GDP owing to the reduced copper tax base alone. Meanwhile, reduced export proceeds will exacerbate the trade deficits that have emerged in recent months (see Exhibit 2), further widening the current account deficit beyond our projected 3% of GDP for 2015, and add to the forces driving the recent rapid depreciation of currency. During the past five months, the kwacha has depreciated by 30% against the US dollar, more than any other currency in the region.

Exchange rate depreciation will raise foreign-currency-denominated debt servicing costs and inflate the size of US dollar-denominated debt relative to GDP, further limiting the government’s options to deploy counter-cyclical fiscal policies to stimulate the economy and address infrastructure deficits constraining the country’s growth.

Source: 14 September 2015, Moody’s Credit Outlook.