Identifier
Created
Classification
Origin
08LUSAKA865
2008-08-27 11:55:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lusaka
Cable title:  

KWACHA GENTLY SLIDES IN WAKE OF PRESIDENT'S DEATH

Tags:  ECON EFIN EINV PGOV ZA 
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VZCZCXRO9592
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0865/01 2401155
ZNR UUUUU ZZH
R 271155Z AUG 08
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 6184
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 02 LUSAKA 000865 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV ZA
SUBJECT: KWACHA GENTLY SLIDES IN WAKE OF PRESIDENT'S DEATH

UNCLAS SECTION 01 OF 02 LUSAKA 000865

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV ZA
SUBJECT: KWACHA GENTLY SLIDES IN WAKE OF PRESIDENT'S DEATH


1. (SBU) Summary: Zambia's economy remains relatively sound,
despite foreign exchange market fluctuations immediately
following news of President Mwanawasa's death. Although the
Zambian Kwacha has slipped slightly against the U.S. Dollar,
it remains in line with historical averages. The Lusaka
Stock Exchange remained open all week, yet the All Stock
Index continued to fall. Zambian Government (GRZ) officials
have reassured investors that Zambia's economic future is
secure. Nevertheless, markets may continue to reflect the
uncertainty bred by forthcoming presidential elections, as
well as possible GRZ fiscal irresponsibility. End summary.



2. (U) Minutes after Acting President Rupiah Banda announced
President Mwanawasa's death on Zambian television on August
19, the Zambian Kwacha (K) experienced a sudden slide in
international currency markets, falling by K100 to
K3,500/USD. By mid-week, the currency fell another three
percent, to approximately K3,600/USD, before adjusting at
week's end to K3,535/USD. Despite the recent weakening, the
current exchange rate is stronger than the 12-month
historical average of approximately K3,700/USD and well
within the normal range of activity. An economist at
Standard Bank Zambia, a South African subsidiary, described
the exchange rate as "a barometer for the sentiment of the
international community." She said Standard Bank "expects it
to remain stable in the period leading up to the elections,
barring any alarming development, which is highly unlikely in
a politically stable country like Zambia."


3. (SBU) Within hours of Banda's announcement, Finance
Minister Ng'andu Magande sought to ensure international
investors that the GRZ will continue to pursue
market-friendly policies. In an interview with Reuters,
Magande insisted that the GRZ's macroeconomic policy will
continue. Secretary of the Treasury Evans Chibiliti made
similar comments, assuring reporters that the GRZ is
well-prepared to continue implementing Mwanawasa's economic
agenda, and that the budget cycle will remain on track. A
private sector analyst suggested to emboff that the GRZ is
keen to "steel investors' nerves" given that foreign
investment in GRZ securities has risen to USD 257 million
from practically zero in recent years. Magande's interview
with international financial journalists so early in the
mourning period may also have served his presidential
ambitions.


4. (SBU) Zambia's equity market, the Lusaka Stock Exchange
(LuSe),was less affected by the news of President
Mwanawasa's death. During the week ending August 22, the
LuSe All Share Index (LASI) experienced a modest decline,
closing at 3,663, twenty points below the August 15 level. A
LuSe broker told emboff that the recent drop is part of a
decline that began earlier in the summer, when a large number
of local investors floated their shares in order to obtain
capital to compete in a highly-anticipated initial public
offering of a telecommunications company, Celtel. When
Celtel's share price fell, in response to a financial report
in July, local and international investors alike dumped
equities.


5. (SBU) The LuSe broker conceded that Mwanawasa's stroke
also had some bearing on the LASI, which peaked at over 4,200
in late June, with international investors expressing some
concern about political uncertainty. The drop in share
prices, which roughly coincided with President Mwanawasa's
stroke on June 29, suggests that investors reacted to the
knell of Mwanawasa's ailing health--and the exchange bore the
impact of market uncertainty--in advance of the President's
passing away on August 19. A United States-based private
sector analyst told emboff that "institutional investors will
take a 'wait and see' approach to treasury bonds and currency
exposure."


6. (SBU) Comment: Zambia's capital and foreign exchange
markets seem to have absorbed the economic shock of the
President's death without undermining the country's growth
prospects. Nevertheless, markets are likely to experience
additional volatility in the lead-up to the presidential
elections, particularly given strong levels of support for
the populist presidential candidate Michael Sata, who built
his 2006 campaign on a platform of anti-(foreign) investment
and intolerance. Additionally, GRZ discretionary spending is
set to increase manifold in the year's fourth quarter, due to
the unbudgeted costs associated with the state funeral and
presidential election. A recent GRZ pledge to increase its
fertilizer support program by almost three hundred percent,
an across the board salary increase for Members of
Parliament, and the ruling Movement for Multiparty
Democracy's potential (illegitimate) use of government
resources on campaigning may further weaken Zambia's

LUSAKA 00000865 002 OF 002


macroeconomic performance and the GRZ's reputation for fiscal
discipline.

KOPLOVSKY