EXPLORING POSSIBILITIES
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.
EXPLORING POSSIBILITIES
TABLE OF CONTENTS
Year In Review
What A Year
Zambia has long been a bastion of stability in Southern Africa, and while its economy has been rocked in recent years by the falling value of copper prices, a devaluating kwacha, and high inflation, through the Economic Recovery Program the government has bold ambitions to right the ship.
read articleReview
Convoke, Confound & Collect
Squeezed between a rock and a rather hard place by the slowdown in Chinese demand for copper, by far Zambia's biggest export and government-revenue generator, President Lungu has been forced to get creative in his country's alliances to broaden revenue streams and lessen its dependence on the vagaries of one foreign market.
read articleGuest Speaker
Dr. Stergomena L. Tax, Executive Secretary, Southern African Development Community (SADC)
TBY talks to Dr. Stergomena L. Tax, Executive Secretary of the Southern African Development Community (SADC), on regional economic development, boosting pan-continental free trade agreements, and improving security through mutual development.
read articleInterview
Susan Sikaneta, Ambassador, Zambia to Ethiopia & Permanent Representative to the African Union and Economic Commission for Africa
TBY talks to Susan Sikaneta, Ambassador of Zambia to Ethiopia & Permanent Representative to the African Union and Economic Commission for Africa, on championing peace across the continent, advancing women's rights, and promoting Pan-Africanism.
read articleInterview
Sebastian C. Kopulande, CEO, Zambian International Trade & Investment Centre (ZITIC)
TBY talks to Sebastian C. Kopulande, CEO of Zambian International Trade & Investment Centre (ZITIC), on taming austerity, stimulating sustainable growth, and creating the framework to support entrepreneurship
read articleFocus: Zambia Plus
Adding it All Up
On October 20, 2016, at the 2017 Budget Address, Finance Minister Felix Mutati launched the government's economic recovery program, christened "Zambia Plus." The program is designed to spur domestic productivity, through strengthening ties and collaborating with external donors and developers.
read articleReview: Banking
Macroeconomics Rule the Roost
In its ongoing efforts to diversify away from one principal commodity, copper, the government fosters the development, standardization, and efficacy of the private sector. In doing so the systematic support of the financial universe, especially banks, is vital, as is the goal of financial inclusion.
read articleFocus: SME Growth
IMF support program
An IMF support program stands to provide Zambia with some much-needed discipline on its expenditure and operational efficiencies; however, many caution the need for Zambia to determine what it wants to achieve and how the program will benefit the country.
read articleInterview
Christabel M. Banda, Executive Director, Insurers Association of Zambia (IAZ)
TBY talks to Christabel M. Banda, Executive Director of Insurers Association of Zambia (IAZ), on the evolution of the local insurance landscape, raising awareness, and tackling challenges in the sector.
read articleFocus: Solar
Sunny Side Up
As power demand continues to rise and power production continues to fall behind, it's the same old story for Zambia, still wrestling with an ongoing energy crisis. Public- and private-sector drives are seeking to mitigate this deficit by activating the country's solar industry.
read articleInterview
Margaret K. Chalwe-Mudenda, Director General, Zambia Information and Communications Technology Authority (ZICTA)
TBY talks to Margaret K. Chalwe-Mudenda, Director General of Zambia Information and Communications Technology Authority (ZICTA), on new projects, the ZNDC, and expectations for the year ahead.
read articleInterview
Hon. Dora Siliya, Minister, Agriculture
TBY talks to Hon. Dora Siliya, Minister of Agriculture, on the investments being made in agriculture to enable agricultural households, diversifying Zambia's basket of produce, and making international markets more accessible for local producers.
read articleInterview
Hon. Charles R. Banda, Minister, Tourism and Arts
TBY talks to Hon. Charles R. Banda, Minister of Tourism and Arts, on the wealth of tourism destinations within Zambia, efforts to bring more visitors to the country, and what the Tourism Development Fund will contribute to developments.
read article