After Zambia’s recent presidential election saw the opposition leader Hakainde Hichilema (popularly known as HH) beat incumbent President Edgar Lungu by an overwhelming margin, Zambian assets significantly outperformed their EM peers in August.
This is quite a turnaround for a country that defaulted on its external debt in November 2020.
While, as we wrote here, the default set in motion a course back towards macro-economic stability, uncertainty lingered over the country’s policy direction and the outlook for reform under the previous incumbent – all of which matters in the context of IMF support.
Recent months have brought plenty of positive news for the country, helping to support asset prices even before the election result. Rising copper prices have contributed to a remarkable rebalance of Zambia’s external position, with the country’s trade balance now in significant surplus. Zambia was also one of the most significant beneficiaries of the IMF’s increased Special Drawing Rights (SDR) allocation, which amounted to 7% of the country’s GDP. But the reform agenda remained a sticking point.
Despite attempts to prevent him from campaigning, the election result was a resounding victory for HH. The market’s positive reaction to this reflects our view that the last piece of the puzzle needed to complete a positive structural picture for Zambia has fallen into place.
Why was the election result so significant? For a start, the peaceful transfer of power combined with one of the largest election turnouts since independence underscored Zambia’s democratic credentials. Crucially for debt investors, Zambian asset valuations had been depressed largely due to the poor economic management under President Lungu; fiscal profligacy and corruption saw economic imbalances continue to build until Zambia defaulted on its external debt and local yields rose to almost 35%. With an HH victory, a lot of that is likely to be reversed. HH is supported by a strong team of technocrats and will be Zambia’s first president to have a background in business.
We also expect this change to fast-forward an agreement with the IMF, while changes in the mining sector - which was mired by inconsistent policies under Lungu’s presidency - may also see significant investment and a return to the 5-6% growth levels Zambia experienced in the past.
There is now every chance that Zambia could become an example that its frontier market peers seek to emulate.