HIGHER COPPER PRICES, BUMPER MAIZE CROP LIFT

UNCLAS SECTION 01 OF 02 LUSAKA 000571

SIPDIS

E.O. 12958: N/A
TAGS: ECON ZA
SUBJECT: HIGHER COPPER PRICES, BUMPER MAIZE CROP LIFT
ZAMBIA'S ECONOMIC PROSPECTS

REF: LUSAKA 339

SUMMARY
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1. (SBU) Amid signs of economic recovery, Embassy contacts
expressed cautious optimism that Zambia may have turned from
crisis to stability and growth. Copper prices have risen
over 100 percent from their lows in early 2009, reviving the
moribund sector and spurring export growth. Zambia recorded
a bumper maize harvest, with a projected 600,000 ton surplus
of its staple crop. The Kwacha has stabilized and
strengthened 12.5 percent from its 2009 low to under 4,900
Kwacha per dollar. Food surpluses and a strengthened Kwacha
could ease inflationary pressure through the end of the year.
The Zambian Government (GRZ) revised its GDP growth forecast
to 4.5 percent, although other observers expect growth to be
somewhat lower. Government revenues were down almost 25
percent in the first half of 2009, mainly due to lower
revenue from trade and a delay in budget support from donors.
The GRZ drew on an IMF facility to make up some of the
difference to maintain expenditures, and Ministry of Finance
and National Development (MFND) contacts told us that a
pickup in economic activity in the second half of the year
should make up revenue shortfalls. End Summary.

GRZ Expects 4.5 percent GDP Growth
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2. (SBU) The Minister of Finance and National Development
reported to Parliament at the end of July that the GRZ
projected 4.5 percent GDP growth in 2009, an improvement over
the June projection of 4 percent growth, but lower than the 5
percent growth projected at the beginning of the year. The
Minister reported that government revenue was down by almost
25 percent through June, mainly due to lower trade and delays
in disbursement of donor budget support funding. Lower
revenues put pressure on government spending, especially the
GRZ's capital expenditure program.


3. (SBU) IMF ResRep Birgir Arnson told econoff that the GRZ
had drawn on its IMF reserve facility and pledged the drawn
amount to a loan from the Bank of Zambia (BoZ) to cover about
33 percent of the revenue shortfall and maintain its spending
program. Arnson estimated that the 2009 budget deficit would
increase to 3.2 percent from 2.6 percent of GDP, with a
commensurate increase in domestic financing. Arnson said
that the GRZ's public debt was well-contained at less than 25
percent of GDP and that there was little risk of debt
distress.


4. (SBU) Arnson suggested that the GRZ was being a bit
optimistic in its 4.5 percent GDP growth projection, saying
that the IMF projected about 4 percent growth. The Economist
Intelligence Unit (EIU) also revised its growth projection
for Zambia to 2.6 percent GDP growth in 2009 from the
previously projected 0.8 percent contraction.

A Rising Copper Price Lifts All Boats
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5. (SBU) World copper prices have rebounded from a low of
about USD 1.20/lb to over USD 3.00/lb in August, spurring
production and export growth in the sector and leading to a
USD 71 million trade surplus in July. Nathan Chishimba, the
Chairman of the Chamber of Mines, told emboff that a soft
recovery in global demand and production issues in Chile and
Mexico was driving price recovery. He expected prices to
soften to about USD 2.5/lb by the end of the year but said
that, at that price, even Zambia's most inefficient mines,
which have a production cost of around USD 2.0/lb, could
remain productive and profitable.


6. (SBU) Hanson Sindowe, Chairman of Copperbelt Energy
Corporation (CEC),which supplies electricity to the
Copperbelt told econoff that many of Zambia's mines
overreacted to the drop in prices, and were now scrambling to
come back online. CEC lost about 25 percent of its load in
early 2009, but Sindowe predicted that CEC's load would
return to its pre-crisis levels by the end of the year as
mines increase production and the Luanshya mine emerges from
"care and maintenance."


7. (SBU) While the mining sector represents about 8 to 10
percent of the GDP, Savior Chibiye, Managing Director of
Citibank in Zambia, said that the ancillary benefits to the
economy, in services, equipment, transport, energy and labor,
could not be overstated. Chishimba agreed, describing what
he called the "Plane and Hotel Index." Chishimba knows that
things are going well when he has difficulty booking flights
to and hotels in Ndola. After nearly empty flights and
hotels in early 2009, he said, booking has once again become

LUSAKA 00000571 002 OF 002


a problem because "everything is sold out."

Kwacha Stabilizes -- Could Further Strengthen in Short Term
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8. (SBU) After falling to over 5,600 per dollar in early
2009 due to low copper prices, capital flight and delays in
donor funding, the Kwacha stabilized and has strengthened to
under 4,900 Kwacha per dollar. Increased copper exports
combined with lower consumption (thus lower imports) eased
pressure on the Kwacha. Citibank's Chibiye said that the
financial sector has also seen the return of some foreign
portfolio investment after foreign investors withdrew almost
half of their estimated USD 200 million in late 2008 and
early 2009. He speculated that the Kwacha could further
strengthen to about 4,600 per dollar but said that he
expected the longer-term rate to fall somewhere between 5,000
and 5,500 Kwacha per dollar.


9. (SBU) After depleting its reserves to smooth exchange rate
volatility, the Bank of Zambia (BoZ) utilized a portion of a
USD 280 million IMF reserve support facility to increase its
reserves to over USD one billion. ResRep Arnson expected
that Zambia's USD 600 million Special Drawing Rights (SDR)
facility could be in place by the end of September resulting
in five months import coverage, which he said should allow
the BoZ to better manage exchange rate volatility.

Bumper Maize Crop Could Boost Exports, Ease Inflation Pressure
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10. (SBU) Zambia recorded an estimated 1.88 million ton maize
crop in 2009. With domestic consumption at about 1.3 million
tons, the country should have a surplus of almost 600,000
tons. Market observers expect the surplus to ease corn meal
prices and allow for significant maize exports. The GRZ
announced that it will lift the maize export ban for an
initial 100,000 tons of exports, but the GRZ is expected to
allow further exports, as the domestic market cannot absorb a
500,000 ton surplus.


11. (SBU) ResRep Arnson expects inflation to ease somewhat,
due to lower maize prices and a strengthened and stable
Kwacha. Inflation has already dropped to 14 percent from
14.7 percent in May. He said that if conditions continue,
the GRZ could get close to its 2009 target of 10 percent
inflation. Separately, an MFND official told us that the
revised 4.5 percent GDP growth projection was based on 13.8
percent inflation.

COMMENT
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12. (SBU) The doom and gloom economic scenarios of just a
few months ago have been replaced with cautious optimism.
While the Zambian economy remains vulnerable to world copper
price volatility and structural weaknesses, we expect that
improved copper prices, coupled with a strong maize harvest,
mean Zambia is on a fairly rapid economic rebound.
BOOTH