Lusaka, Zambia’s capital reaches an average high temperature of around 35 degrees Celsius during October. So, when an official “weather advisory” was released as I was boarding my flight, I certainly didn’t pop into the Cape Union Mart in Johannesburg’s duty-free for an extra fleece.

Zambia is a mid-sized country, formerly known as Northern Rhodesia. The word Zambia is derived from Zambezi, meaning “grand river”. The country is landlocked with a long list of neighbours, bordering Zimbabwe, Botswana, Mozambique, Malawi, Angola to the west, and the most notable from an economic perspective, the Democratic Republic of the Congo (DRC). Zambia’s most important export is copper, and the Copperbelt extends across the DRC and the northwest of Zambia. Copper accounts for around 13% of the economy and it is a key commodity in the energy transition story, so there is lots of foreign investment interest around this part of the country.

Currently, Zambia is undergoing a difficult economic period, due to it having borrowed too much. But if managed correctly, its copper resources can help in navigating a positive future. In most years, Zambia has a current account surplus since it exports more than it imports. In Africa, surpluses are usually the exclusive domains of the oil exporters, yet Zambia does have a positive history in this regard. Worryingly Zambia has not managed its relationships with the mining sector well, and disagreements have led to low investment and a declining copper production in recent years.

The country finds itself in a terrible debt situation. Debt to gross domestic product has reached around 110%. While this ratio is manageable in low interest rate countries (the US is at around 130%, Japan at 260% and Germany at 70%), when borrowing costs are high, cracks start appearing for many developing countries (as seen in Ghana, Egypt, and Zambia). Zambia has the title of being the first African country to default on its debt during the Covid crisis in 2020.

It has borrowed from across the dance floor and its creditors are the multilateral lenders, such as the International Monetary Fund (IMF), the World Bank and African Development Bank, international portfolio investors, and importantly directly from China. When the music stopped playing in 2020 Zambia defaulted on payments. For the last three years Zambia has been in debt restructuring discussions with its creditors. Progress has been slow, reportedly because China (the largest of the creditors) was unwilling to be treated in line with general creditors, wishing to be treated as with the IMF. China has been lending to many developing countries, and so I guess China does not want to set an easy precedent for other countries that it has lent to. Having said this, in September the Zambian government made some positive announcements around its debt restructuring progress (positive in terms of progress, not positive for offshore creditors, who are likely to only get back about 40% less than the original terms). Still, once there is greater certainty, international investors are likely to be more willing to invest.I first visited Zambia in 1997. My first vacation after being employed. I went with university friends to take on the white water of the Zambezi gorge below the Victoria Falls, or Mosi-oa-Tunya as known by the locals. Investing in Zambia has proven to be as wild as the kayaking. Instead of calling Zambian bonds by the year they were issued, they may as well have taken the names of the rapids.

It is interesting to see how things have changed since my first visit. While measuring development is always tricky, there are some hard measures:

• Population has more than doubled from nine million to 20 million. This is an annual growth rate of 3.2%. This rate is closer to 2.5% currently.
• The US dollar cost 1.40 kwacha, today it costs 21. The currency has lost around 10% each year.
• The economy has grown from $4bn to $22bn. This is a GDP growth rate of 7% per annum. This means the GDP per capita has grown from $470 to $1100. This number peaked 10 years back at closer to $2000.

Buried in these numbers are the long-term investment drivers for Africa. The increasing population and development catch-up are going to be the drivers of earnings growth. Returns for foreign investors though will likely be offset by a weaker currency.

Over the years we have invested in Zambian listed equities and fixed income. At this time, we have no equity exposure but over the years the fund has been exposed to the beverage company (Zambian Breweries), Lafarge Cement and Zambeef, a local agriculture and retail business. Currently, the Old Mutual Flexible Income Fund has exposure to local Zambian debt.

Offshore debt is currently yielding around 38%. Of course, the haircut still needs to be applied. We estimate that after the haircut, the yield is still an attractive 14%. The Zambia 26 has returned 29% year-to-date.

While offshore debt carries default risk, local debt tends to carry currency risk. I say tend as Ghana’s restructuring process started with local debt and my discussions in Zambia indicate that the authorities have no intention of restructuring local debt. Zambia’s local currency longer-dated debt is yielding around 25%. Offsetting this return will be the currency movement. Assuming Zambia’s kwacha persists to weaken around 10% per annum, the dollar return will be around 15%. Saying this, we think that given the restructuring and improved outlook for copper production, the currency could have a period of greater stability.

The Lusaka Stock Exchange has 24 listed businesses. The companies we met with were bullish, and all seem to offer interesting growth opportunities. The local banks are enjoying the high interest rates. Zambeef has new management that is trying to tighten corporate governance and talking about returns being generated by investment. The businesses with copper exposure are excited by the expectation of new investments into two of the larger mines, Konkola and Mopani. The companies’ bullishness is not surprising given the low base and prospects that a growing population offers. Our main reservation currently is the liquidity of the stock market. A couple of years ago the stock exchange turned over $1m each day. Now, this number is trending closer to $100 000.

Zambia has the making for an exciting investment story, possibly why it was able to borrow so easily over the last 10 years. Once the restructuring of the existing debt is out the way and two of its largest copper mines ramp up production, GDP growth of 8% to 10% per annum, as was seen in the first decade of the 2000s, is possible once again.   

Meanwhile, efforts to curb charcoal-related deforestation continue. Charcoal is currently sold along all the main roads. Zambeef says it is no longer using this charcoal for heating its chicken broilers.After looking for investment opportunities and calculating potential returns, it was time to see what locals do. Spent the weekend with some friends who live in Zambia.