Everyone Has an Opinion

Last week President Donald Trump made his first tweet that included the word Africa when he said:

I have asked Secretary of State @SecPompeo to closely study the South Africa land and farm seizures and expropriations and the large scale killing of farmers. “South African Government is now seizing land from white farmers.” @TuckerCarlson @FoxNews

The South African government responded on Twitter refuting the assertion made by Trump describing it as a narrow perception intended to divide the country and reminiscent of its colonial past.  Trump followed up with several other tweets as he is wont to do, and I guess as far as him stirring up controversy there is nothing new here.

What to me was of interest was a follow up opinion piece by Bloomberg that was critical of Cyril Ramaphosa and his proposed land reform initiative. In summary, the Ramaphosa led ANC intends to amend the constitution so that the government can reclaim land without paying the current owners who are mostly white farmers. Although black people account for about 80 percent of the South African population they own only 4 percent farm land and agriculture holdings. And unfortunately, this did not just happen by chance or the choice of black people. Through the 1913 Natives Land Act, the minority whites in power then, banned the natives Africans from acquiring land. Hmm…doesn’t sound fair to me.

The Bloomberg article criticized Ramaphosa’s approach as being antithetical to his desire to attract foreign investment. According to the editors, pursuing these policies is all but certain to put foreign investors on edge, and hurt the very people they are meant to help. They then proceeded to describe and elaborate on South Africa’s current economic challenges which include high unemployment and widening budget and current account gaps. Basically, too many people don’t have jobs, the government can’t generate enough revenue and must borrow more, and the outside world is not buying as much of South Africa’s output.

Currently, the South African government has been reclaiming land through voluntary purchases and the Bloomberg editors encourage the South African government to rather focus on making this process work. Unfortunately, 70 percent of the land that has been repossessed so far remains unused and in many cases people who have lodged claims for restitution have asked the courts to give them cash as compensation instead of farms. So I guess the editors make a fair point.

This made me think, for most leaders whether in business or politics, they will face a situation for which there is no textbook solution or relevant precedent to learn from. Inequality in South Africa is a real problem – the World Bank in a 2017 study found it to be the country with the highest level of inequality in the world. The top 1 percent of South Africans owns about 71% of the nation’s wealth and this has tended to also follow racial lines. So clearly Ramaphosa and his government must do something.

The danger of inequality is that it becomes more likely that those left economically behind will reach out and drag those that are ahead downwards. Also, high inequality creates interesting results as the rich and the poor have to find a way to live together. For example, a study of high net worth individuals in South Africa showed that 66 percent owned or intended to purchase an alarm system in the next 6-12 months. Basically, they spend disproportionately more on security than the average South African.

Fajnzylber, Lederman and Loayza found a robust relationship between income inequality and violent crime and it’s no secret that South Africa has one of the world’s highest crime rates. So, if you live in South Africa, this is a real problem and you want your leaders to address or solve it. So regardless of what one thinks about what is being done it is at least easy to appreciate why this issue is being and should be discussed in the first place.

Put yourself in Cyril’s shoes considering the options of what he and the ANC must do. Tiruneh argues that revolutions are caused by either lack of economic development, regime type or state ineffectiveness. Ramaphosa is faced with the likelihood that two out of these three problems have occurred. Firstly, economic growth has slowed over recent years worsened by high income inequality. Secondly, South Africans are growing increasingly disillusioned with the government’s ability to address the country’s problems. The rise in popularity of Julius Malema’s Economic Freedom Fighters (EFF) provides testament to this.

I know, throwing in a revolution is a bit extreme but as they say a stitch in time saves nine. Malema used to sound crazy but amazingly his party has grown from strength to strength becoming the country’s third largest political party within 12 months of its formation. It’s performance in subsequent elections has also been improving with 25 seats held in the country’s National Assembly. This gives them a powerful voice to their hard-line stance on land restitution.

Whereas the Bloomberg editors advocate for resisting succumbing to populist demands which I can understand, I believe Ramaphosa and the ANC should be allowed to explore all their options including reclamation without compensation. The cost of the land reclamation initiative up to 2021 is expected to cost just under USD1 billion. It’s a small share of the national budget but regardless it is still a lot of money and I am not sure it is enough to achieve the equality that the government is targeting.

Anyway, I am not sure if cost should be the strongest consideration here and I am inclined to think not. Instead, I am reminded of a saying in business that culture eats strategy for breakfast and that any strategy that ignores the values and beliefs of the people it affects is bound to fail. I think Brexit and the election of Donald Trump provide an example of this at a national level. The almost self-destructive behaviour displayed by populace in these examples show that people will refuse what’s good for them simply because they don’t like it. I guess not too different from a child refusing his or her vegetables.

As a parent, you know it’s your responsibility to ensure that your kids get a balanced diet with a healthy dose of vegetables. There will be a lot of advice about how to do it and most of it will make sense. However, those people don’t know what Junior is like and they should regard themselves as fortunate to not be tasked with ensuring the little tyrant gets his daily requirements of roughage and vitamins. You may find that you have to invest in an Iron Man or Batman suit and devise an adventure in which Junior eating his vegetables is crucial to defeating the villain and saving the world.

Credit to Ramaphosa, he has continually stressed that he wants a solution that is amicable and avoids the path that Zimbabwe took. I suspect he is acutely aware of the challenges and implications of any decision that he makes. But unlike all of us, he actually has to make the decision. One thing is for sure, he can expect lots of advice, well-meaning and otherwise, including from people that suggest solutions whose consequences they don’t have to live with.

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For the Love of the Game

Football Fever

The FIFA World Cup is upon us and much of the world is caught in a football frenzy. I am assuming that at least the 3.2 billion people that watched the World Cup in 2014 are tuned in again this time around. That’s almost half of the world’s population which is estimated at 7.6 billion people. Screenslaver, the villain from the Incredibles 2 (which just broke Box Office records for a Disney animation) would consider it Christmas to have all those eyeballs glued to a screen.

But I can imagine one other person who would be happier than Screenslaver or the three billion plus adoring fans that the World Cup is finally here – FIFA! Of course FIFA isn’t a person but you know what I mean. You see, FIFA like most organisations (I consider it more a business) has revenues and expenses, but unlike most business it plans it financial affairs over a four-year cycle. This matches the World Cup calendar in which the international competition takes place every four years.

FIFA makes just over half of its money from television rights sold to broadcasters to beam FIFA organized events. Another quarter of its income comes from marketing rights sold to companies like Coca Cola, VISA, Qatar Airways etc so that they can co-brand FIFA organized tournaments. Over the current cycle, which runs from 2015 to 2018, FIFA budgeted for revenue of USD5.66 billion which is just about how much Kansanshi Mining would make over a similar period[1].

However, unlike Kansanshi or most other companies which would have this income spread fairly even across the four years, FIFA however finds itself in an interesting position. You see, FIFA organizes a number of tournaments for which it sells broadcasting, marketing and licencing rights including;

  • FIFA Women’s World Cup;
  • FIFA Club World Cup;
  • FIFA Youth Tournaments;
  • FIFA Beach Soccer World Cup; and
  • FIFA Confederations Cup.

In terms of popularity and consequently monetary value the FIFA World Cup is the clear winner. As a result, 69 percent of the USD5.66 billion FIFA budget is dependent on things at the World Cup in Russia going smoothly. Talk about putting your eggs in one basket! So if you think you love the World Cup and football I am happy to bet you don’t love it as much as FIFA does.

[1] Based on 2016 revenue multiplied by 4 years

My First Lent Observation

Although I was baptized Catholic I have not attended a Catholic service save for weddings and funerals since high school. My drift from the church was mainly because my father, the Catholic one of my parents, passed away when I was a kid and before I formed a strong attachment to it. My step-dad is Anglican and given the similarities with the Catholic church it was easy for me to change over to the Anglican church.

After leaving the folks to live on my own, my church attendance record is admittedly way beneath what my mother would like. She reminds me about this in the most unrelated conversations. On one occasion I called her and said
“Hi mum, sorry I haven’t sent the electricity tokens yet. I tried to buy some using my mobile banking but it’s not working and of the agencies that I have driven to – one is closed and the system is down for the other. I am looking for another alternative now”.
She responded without hesitation, “It’s because you don’t go to church that’s why things are so difficult for you…”
Tired of receiving a negative response on many occasions to the question, “Did you go to church today?” she took an evidence based approach to demonstrate the effects of the apparent lack of God in my life. You have to love mums, with all the strange things they say or do, you know its because they have your best interests at heart.

I digress, the reason I bring up church and particularly the Catholic church is because of Ash Wednesday which fell on the 10th of February and marks the beginning of Lent. Lent is the 40 days (excluding Sundays) before Easter and is related to the 40 days Jesus Christ spent fasting in the desert before entering into his public ministry. Catholics and many other Christians (and non Christians actually) seek to imitate Christ by fasting during this period or giving up a particular vice such as drinking, smoking etc.

A query on one of the Whatsapp group chats I am on reminded me that it was that time of the year again. For some reason I am yet to understand, the idea of sacrifice and self-discipline resonated with me this time and I decided I am giving up something I enjoy doing for the next 44 days! After a bit of thought I decided I would give up the following:

  • Television – This also includes movies at the cinema, video games, YouTube and other online video sites like 9gag. I must confess that watching television is probably my favourite past-time and that turning on the telly is the first thing I do when I get home after taking off my shoes. I’ve been know to study whilst watching a movie – yes I know it’s quite shameful. Given this attachment I know it will be quite difficult to get through the next 42 days without switching on the tube (or is it the LED these days?)
  • Facebook – Given the frequency with which I (and I am sure many other people too) scroll through my timeline on Facebook and also the occasions you would think I get paid for it. Facebook can therefore be such a strong distraction and I have decided to cut it off for a while. This includes other social media such as Twitter (which I am never really on anyway), casual web surfing and all my groups on Whatsapp save for my CFA study group.
  • Excuses – Yes I am giving up on excuses! This habit I intend to kick to the curb permanently and was inspired by my good friend Trevor Mumba who when I asked what he was giving up for Lent responded, “Nothing, I gave up excuses and laziness a long time ago.” I liked it and copied it – there is no shame in imitating best practice

My choices of things to forego this Lent all have one central theme – to remove some of the distractions in my life. This should allow me to focus completely on attaining my goals this year and I have big goals! I will share my experience and progress through this blog (with writing more as one of my goals this year.)

Wish me luck and let me know what you’re giving up.

AC

P.S. I will also try to go church more often 😉

The Kwacha’s Performance

THE KWACHA’S PERFORMANCE
7th September 2015
By Austin Chijikwa

IMPORTANT NOTE: The authors views are entirely his own and do not necessarily represent the views of his employer. This is only for information purposes and does not constitute advice. The author is not liable for any actions taken based on the contents of this report.

PAST PERFORMANCE
The Kwacha has generally shown a declining trend over the last five years although its depreciation has accelerated in the last two years. From 2010 to early 2015 the local currency has floated between K4.500 and K5.500 before breaking above the K5.500 and signalling the onset of a more tumultuous period for the Kwacha.

ZMWDepreciation
Figure 1 Kwacha Performance for past 5 years (Reuters)

The Kwacha’s first rapid depreciation occurred in the second quarter of 2014 as the local unit plummeted to a then all-time low of 7.3 against the greenback. The depreciation at that time was attributed to several factors including

  1. Fiscal Deficit: The government according to the IMF in 2013 significantly overshot their budget deficit projections of 4.1% of the country GDP to about 8.6% instead. Almost all spending deviated significantly from budgeted levels e.g.:
    Wages increased in September 2013 by 45% versus the planned 9.1% with the full effects expected to be felt         in 2014.
    – Spending on subsidies reached 4% of the budget against a planned 0.7%
    To finance the deficit government increased borrowing through Treasury Bills as well as part of the 2012 Eurobond proceeds given to state-owned enterprises but had not yet been spent (IMF).
  2. Policy Uncertainty: Frequent regulatory changes appeared to have had a negative effect on the business environment and particularly the introduction of Statutory Instrument No. 33 which restricted the pricing of goods to Kwacha and Statutory Instrument 55 of 2013 which introduced new measures to enhance monitoring of Balance of Payment -BOP (the flow of funds, good and services in and out of the country). The two regulations had an easily observable impact on the exchange rates with their introduction preceding an appreciation of the Kwacha. However, stricter BOP controls and related restrictions on VAT refunds appear to have had to a greater extent affected the mining sector which contributes around two-thirds of Zambia’s foreign exchange earnings. In what looked like a stand-off, supply of foreign exchange from the mines withered putting pressure on the Kwacha.
  3. Low Copper Prices: A sharp drop in copper prices precipitated by concerns of slowing growth in China appears to have triggered the sharp drop in the Kwacha. Copper prices dropped the most in one day on 6 Mar 2014 since December 2011 and to their lowest in two years after a Chinese solar company became the first company to default on a bond traded in mainland China according to the Wall Street Journal. Chinese copper accounts for about 40% of global refined copper demand explaining the sensitivity of copper prices to events in China.

To curb the Kwacha’s sharp drop the Central Bank took several measures to arrest the fall and reduce volatility in the markets. Implemented measures include

  • Raising monetary policy rates
  • Raising reserve ratio for commercial banks
  • Direct intervention in the foreign exchange markets
  • Revocation of Statutory Instruments 33 and 55

The policy measures appear to have worked as the local currency appreciated strongly to trade within a K6.000 to K6.600 range through the third and fourth quarters of 2014. However these measures were seen as short term with the following comments from ETM Analytics indicating that a broader set of negative fundamentals would prevail over the long term.

“In other words, although the re-dollarisation of the economy following the removal of SI33 and SI55 is a bullish fundamental to the kwacha, there are still a bigger set of bearish fundamentals for the currency that remain in place, and have not showed signs of diminishing, yet. This therefore leads us to hold the view that even as the removal of SI33 and SI55 can help stabilize the kwacha in the short-term (i.e. next three to six months) around the 5.75-6.25 mark against the dollar, it does not by itself lead to a medium- to longer-term strengthening trend of the kwacha.”

The next rapid drop in the Kwacha followed at the beginning of 2015 when the Kwacha broke through the K6.6 barrier. This drop coincided with a steep drop in the prices of oil and copper again.

Figure 2 Copper hits fresh lows - January 2015 (Bloomberg)
Figure 2 Copper hits fresh lows – January 2015 (Bloomberg)

Whereas the steep drop in the Kwacha appeared to have been triggered by the sharp copper decline an underlying widening fiscal deficit continued to be a point of concern. In addition a stand-off between the government and mining companies concerning the payment of value added tax constrained the supply of foreign currency to the market. The IMF calculated in May 2015 that VAT refunds had grown from 1% of GDP to 3% or about ZMW5.5 billion (USD743m using a rate ZMW7.4).

The Central Bank was in a weaker position to contain the depreciation this time around. It’s foreign reserves had significantly declined from around USD3,500m in Q4 2014 to around USD2,800 at this time. Further interest rates were already close to two year highs and the Central Bank was wary about increasing them further.

Figure 3 One Year Treasury Bill Performance for Past 2 years (Reuters)
Figure 3 One Year Treasury Bill Performance for Past 2 years (Reuters)

The absence of a direct intervention may perhaps explain the weaker reversal as the Kwacha appreciated to K7.000 from a low of K7.75 but it was still weaker than K6.6 at the beginning of the move.

The next and most recent fall was precipitated by a 25% drop in the Chinese stock market and unprecedented 6% devaluation of the Yuan by the Chinese Central Bank. This event sent a shockwave through global markets as stocks from the US to Japan dropped as well as commodities. Copper fell to six year lows to reach USD4885 with other commodities also adversely hit. Commodity-linked currencies consequently suffered losses with the Kwacha breaching the K8 barrier and reaching K8.500 within three days before proceeding to over K10 to a dollar. Other frontier/emerging currencies suffered heavy losses as well as shown below.

Kwacha weakest performer amongst African currencies tracked by Bloomberg
Figure 4 Africa Currency Ranker – 1 Month Returns (Bloomberg 5 September 2015)

The drop in Chinese stocks markets and actions taken by the Chinese government to devalue the yuan as well as purchasing of share to shore up its stock market was taken as signal that growth was indeed slowing in the world’s second largest economy. Over the past decade almost half of global GDP growth is attributed to growth in China and poor news from there added to a general negative outlook in other markets such as the Eurozone (e.g. Greece). Portfolio flows out of perceived risky countries therefore weakened their currencies as investors flew to safe-haven assets such as the United States dollar.

WHERE TO FROM HERE
In the medium to long term the following factors are expected to be key drivers for the Kwacha’s direction as they have continued to drive performance over the past 18 months:

    1. COPPER PRICES AND PRODUCTION.

The copper mining industry in Zambia is very important due to contribution to forex earnings (about 70%) and total tax contribution.

  1. Threats to Kwacha Performance
    Dipping copper prices: Data from China has in the recent past more consistently pointed a slowdown in its growth and copper prices continue to reflect this showing a steady decline over the last two years.
    Power Shortage: Reduced power generation due to water problems at the Kariba North Bank power plant will severely affect the mines and force cuts in production. In addition to low copper prices this will negatively impact the value of the country’s exports of which copper accounts for about 70%.
    Regulatory Challenges: The mines have had significant regulatory challenges which has reduced additional investment and general confidence in the sector. Many of these issues have been recently resolved but the after effects will continue to linger while government will probably continue to look for ways to extract revenue from the mines.
  2. Support to Kwacha Performance
    China slowdown may have been exaggerated: Some analysts whilst acknowledging a slowdown in China GDP growth feel that growth will still remain strong. Capital Economics points at seasonally adjusted numbers that show at a recovery in trade growth from last year. In addition, stronger for China’s trading partners such as the US will further support demand for China’s exports.
    Several analysts predict a recovery in copper prices over the long term. Analysts surveyed by Bloomberg show consensus for an increases in copper prices over the next 5 years with estimates or prices returning to over USD6,000 over the next three year. This is expected to provide some long term support for the Kwacha.

Outlook
Copper factors supporting the Kwacha are likely to be outweighed in the short term i.e. probably over the next six months to a year by the threats whose solutions require a longer time frame to implement.

    2. PUBLIC SPENDING/PUBLIC DEFICIT

The government’s domestic and international debt has grown over the last two years and stands at approximately 34% percent of GDP. While this remains within a 45% threshold suggested by the IMF for debt sustainability, worries about the exchange rate and reduced government revenue have still raised concerns.

  1. Threats to Kwacha Performance
    High government expenditure: The government for the past three years has consistently missed spending targets and according to the IMF accumulated domestic arrears equalled 2.5% of GDP (about K4.6bn) in 2014. The upcoming general elections is expected to put more pressure on expenditure and test the fiscal discipline of government.
    Threatened revenue collection due to reduced economic activity (mines and power cuts): The government has struggled to raise budgeted revenue e.g. the revision of mineral royalties bringing into question the ability of government to pay its debts. Poor revenue collection through taxes is expected to extend other sectors whose productions is expected to be reduced by current power shortages. In July 2015 Zesco announced plans to increase power load-shedding hours which they further increased in August. This situation is expected to continue through to the end of the first quarter of 2016 given good rainfall and the commissioning of the Maamba coal-powered plant currently under construction.
    Weaker kwacha and external debt: Whilst a wide public deficit is expected to weigh on the Kwacha, in cyclical fashion a sharp drop in the Kwacha significantly raises the cost of repaying foreign debt. The government’s interest repayments a year add up to around USD190m demand for dollar a year putting further pressure on the Kwacha. A fast depreciating Kwacha further reduces the government’s ability to repay its foreign debt and the currency depreciates further as a result
  2. Support to Kwacha Performance
    Coming online of new generators will reduce power outages: The commissioning of the 300MW Maamba Power Plant is expected to erase the current power deficit next year and may lead to a resumption of normal production.
    Strong growth potential: According to the IMF, foreign direct investments from recent years is expected to pay off through increased mine output and they project GDP growth of between 6-7% in the medium term. Government has also committed to them to try to reduce the fiscal deficit in upcoming in the year.
    Again the threats to the currency look they will prevail over the medium to long term and point towards a weaker Kwacha over that period.

TECHNICAL ANALYSIS
Technical analysis uses the study of past price action to draw conclusions regarding the likely direction and magnitude of future price movements. Technical analysis is usually used for short term positioning ranging from intraday to a weekly basis (Rosenberg and Baker).

Technical indications are mixed but as at midday 7th September 2015, indicators supporting the Kwacha include the Relative Strength Index and Momentum Indicators which show that the Kwacha is oversold and has commenced a change of direction. It looks therefore that the Kwacha is due for a correction at least in the near term after a sharp depreciation. Based on Fibonacci retracements the ZMW may retreat as far as K9.5 which forms the next resistance level. A failure to break through this level may lead to further depreciation whilst a close below this level could take the Kwacha to the next resistance level of around K9.1.

The Moving Average Convergence Divergence (MACD) shows more upward momentum as it trading above the zero line and there is wide divergence between the short and long term moving average lines. This indicator is less conclusive but contradicts the aforementioned indicators and points more to a maintenance of the status quo – a weak Kwacha.

Technical indicators, therefore, to an extent point towards an appreciation in the Kwacha in the near term. However the magnitude and timing are difficult to predict and it should be noted that the structure of the local currency markets does not render this market well for the reliance on technical analysis.

CONCLUSION
Overall factors weakening the Kwacha appear to be the dominant influences in the long term which may go out as far as three years. The currency and economy remain vulnerable to external shocks such as drops in copper prices. Internally a fiscal adjustment is required to contain the growing fiscal deficit but may be difficult to implement without a temporary contraction in GDP growth.

The new equibilirium trading level for the Kwacha is difficult to establish due to the Kwacha’s susceptibility to external shocks but in my estimation should range between K9.5 to 11 over the next two quarters. Going into 2016 a higher range of between K12 to K13 maybe reached.

Genesis

Written in bed at 5:30am in a country other than my own (holidays have a way of inspiring you to action), this is my first blog!

Months of procrastination have preceded this moment having initially played with the idea of starting a blog when I penned down my year’s resolutions. At the time I had more conditions than ideas and probably still do. I wanted my blog to be interesting, well informed, relevant, unique and the list goes on. I hardly regard myself as interesting and therefore ruled out a journal type blog. I moved to the idea of writing about something about which I’m passionate and immediately got concerned that my mind was still blank of ideas. It seems I have no passions!

However, today the thinking comes to an end and the doing starts. Most of my biggest personal accomplishments have started off with an impulsive action followed by a lot of hard-work before culminating into something I sometimes could not have imagined. Therefore, I have started this blog still unsure but with the faith that it will eventually grow into what I would like it to become; interesting, informative, different and a means of personal growth.

Let’s go!