Developments in Zambia's capital markets have the potential over time to free the nation from overdependence on one commodity.

Zambia's capital markets came to life with the promulgation of the Securities Act in December 1993, an act that also heralded the Securities and Exchange Commission (SEC-Zambia), their regulatory body. Subsequently, the Lusaka Stock Exchange (LuSE) commenced operations in February 1994, as a firm step in the nation's shift towards liberalization and economic reform, including the privatization of state-owned entities. Naturally enough, the development of capital markets was seen as an essential means of galvanizing a transparent, efficient, and standardized private sector at home on the one hand, and rendering foreign investment an appealing proposition on the other. This was also to be a route out of dependency on loan facilities through the fostering of local businesses that would turn to the capital markets for the liquidity necessary for growth. In fact, after a decade of swift growth, Zambia is no longer a nation overwhelmingly dependent on grants, to the extent that in 2015 grants accounted for only 1.4% of revenue compared to 98.6% of domestic revenues.
Aware that such processes cannot be achieved overnight, the authorities foresaw, too, a gradual process of awareness building of financial and capital markets instruments that would ultimately manifest in the form of demand, including deposit receipts, exchange traded funds, and special securities in addition to more regular equities and bonds; the LuSE is the only secondary market for government bonds. Elsewhere, the Bond and Derivative Exchange Zambia (BaDEx), incorporated in 2009, has been a licensed exchange since 2011, regulated, like the LuSE, by the SEC.

Some Economic Context

A brief macro-economic detour is perhaps useful to grasp the still nascent nature of the LuSE. Approximately 80% of Zambia's exports are copper-dependent, and the decline in commodity prices observed in 2016 saw the US dollar value of exports slide acccordingly. During 9M2016, the value of exports, at USD4.588 billion, was down 10.4% YoY, greatly exceeding the 2.2% decline in exports overall. Nonetheless, World Bank forecasts point to commodity price recovery of 4.5% in 2017 and 2018 on more balanced global metals supply. And should this be accompanied by tangible progress over the nation's “Zambia Plus” economic recovery plan, positive investor sentiment could follow.

Fertile Plans

A key objective of Zambia Plus is the transformation of the country into an agricultural hub. Related developments of late point to a process of standardization and pursuit of liquidity seen at the LuSE, albeit in the context of commodities, in this case agricultural in nature. The Zambia Agriculture Commodities Exchange (ZAMACE) has signed an agreement with the Johannesburg Stock Exchange (JSE) on the listing of Zambian white maize, soya bean, and wheat futures on the JSE effective March 20, 2017. The advantages of this are both clear and lasting. A functioning derivatives market promises increased liquidity in the market, while providing farmers, consumers, and millers a hedge against price fluctuations. It also entails the availability of accurate and systematic market data, and fosters transparency and competitiveness in a nation where crop prices have historically not been aligned to international prices. Furthermore, proven success over time is expected to see a broadened range of commodity futures traded, ultimately encompassing the entire agricultural portfolio. And beyond that, enhanced competitiveness could allow Zambia to diversify away from its aforementioned heavy reliance on copper.

A Pragmatic Offering

The LuSE trades in both equities and debt, with the market served by seven registered brokerages. It became fully automated in November 2008 and today trades from 11:00 to 14:00 local time. The equity market, on which 22 stocks are traded, comprises two tiers, namely the listed, or main board, and the quoted, or second-tier market. The latter mechanism was devised in recognition of the fact that listing was considered by many would-be entrants as prohibitively expensive, or simply not possible due to their shareholding makup, and or newness, whereby minimum profitability periods did not apply. As Priscilla Sampa, Company Secretary and Acting CEO of the LuSE, explained in a TBY interview, “The alternative market was established to facilitate the entry into the market of companies not quite positioned or ready to meet the more stringent listing requirements of the main tier.” The criteria for main tier listing stipulate that “companies have no less than 300 shareholders and a minimum float requirement of 25%.” However, the alternative market provides for a shareholding of 30 and a minimum float of 10%. Those companies quoted, rather than listed, nonetheless become visible to the public with the theory being that they will seek full listing when circumstances permit; that is, once a certain period of profitability has been demonstrated. “The Alt-M," Sampa explains, “is mostly made up of locals, while the main board is comprised of locals as well as multinationals, many of which entered the market shortly after liberalization.” And having identified potential entrants to the bourse, a process has begun to assist with finding underwriters willing to enable that vital step into the capital markets. Close to 70% of GDP is generated by Zambia's SMEs, which as such has huge potential for future listings. The government has supported credit reforms geared toward SME growth and incentivizes listing by offering tax incentives exclusive to listed companies and stocks.

Performance Muted by Domestic and International Noise

Market capitalization of listed companies (% of GDP) at the LuSE was last measured by the World Bank at 14.58% in 2012. In that year it registered at USD3 billion. By year-end 2016 market capitalization had reached USD5.7 billion. Yet 2016 was an election year, and focus on that event and prevailing high interest rates dented credit availability, and hence consumption, which was felt throughout the economy, including the capital markets. Foreign investor appetite in Zambia was dampened not just by international factors such as Chinese economic growth, but also by continued teething problems in the local economy such as perennial energy shortages. The LuSE recovered towards the end of the year when favorable macro-economic factors such as the lower inflation and higher copper prices kicked in. Furthermore, Sampa added, “The Ministry of Finance has made significant policy changes that we hope will prove investor friendly, and encourage an influx of FDI that will boost the market's performance.” A more recent glance reveals that as of March 24, 2017 the LuSE All Shares Index had gained 5.1% over the previous month, 4.7% over three months, and 5% YtD. Yet over the previous one-year and two-year periods it had posted respective losses of 20.3% and 27.8%.

The LuSE's trajectory will be hugely shaped by economic indicators. On February 22, 2017 the Bank of Zambia (BoZ) reduced its policy rate from 15.5% to 14%, the statutory reserve ratio from 18% to 15.5%, and the overnight lending facility rate from 1,000 basis points to 600 above the policy rate. This is significant in that the central bank was willing to do so to inject some much-needed vim into turbid economic performance, and was allowed to by lowering inflation; YoY inflation for January had declined to 7%, from 7.5%. Greater access to credit at lower rates should, thus, not only be felt in the real economy, but also the capital markets.