Zanaco head of economic research Dr Patrick Chileshe says the trade tensions between the west and China will keep commodity prices subdued and ultimately affect economic growth locally in 2019 and 2020 to a greater extent.
And Dr Chileshe says inflation is projected to average 8.6 percent in 2019 from 7.7 per cent in 2018.
Meanwhile, Dr Chileshe says the Kwacha will depreciate if policy intervention is not taken quickly.
Speaking during the 2019 Zanaco Economic Outlook, Dr Chileshe said the outlook remained positive in 2019 and 2020 but that risks, including a decline in commodity prices due to trade tension, would impact growth to a greater extent.
“Global economic outlook and projection also remains positive but with heightened tensions, especially the trade war that has broken out…risks have intensified. The escalating trade war, though talks have continued, tightening of financial conditions, expected rise in production costs, all these will negatively impact the growth of the economy in the country. Global financial conditions are tightening and are likely to create vulnerability in debt ridden countries. Trade tensions have dampened business optimism and business sentiments have deteriorated as time goes. Dark clouds of trade tensions lead to weak commodity prices declining in the third quarter of 2018, with agro-commodity prices also declining. Unresolved trade tensions will keep commodity prices subdued. Commodity prices are expected to remain subdued if trade tensions are not resolved and the risks will be tilted to the downside,” Dr Chileshe said.
“Locally, economic activity deteriorated in the third quarter free strong performance in the second quarter with key reasons being, drop in commodity prices, high exchange rate volatility and build up in arrears. Outlook for 2019 and 2020 remains positive. 2018 growth is expected at 3.8% from earlier forecasts of 4.3%. 2019 growth is projected at 4.1 percent of GDP growth while 2020 growth is expected at 4.3%. However we do have risks to this growth and they include trade wars. The west and China have been in trade war for sometime now. Risks to grow in 2019 and 2020 include, trade wars, tight global financial conditions, failure to unbundled arrears, introduction of sales tax, projected poor rainfall.”
And Dr Chileshe said inflation was projected to average 8.6 percent in 2019 from 7.7 per cent in 2018.
“Inflation has edged upwards in 2018 and is expected to rise further in 2019. Inflation breached the upper bound of the target range in the third quarter due to both food and non-food prices. Inflation is projected to rise in 2019 and is expected to average at 8.6 % from 7.7% in 2018. There are risks to this forecast including higher exchange volatility due to trade deficit, external debt service obligations, sovereign credit downgrade, El-nino. Downside; improved electricity supply-lower cost, governments efforts to arrest growing debts,” he said.
“Zambia’s sovereign risk increased fiscal imbalances fuel sovereign credit rating downgrade. Yields on bonds have risen sharply. Rising government debt, tight global financial conditions and failing commodity prices have fueled sovereign downgrade. Key factors explaining this include; concern about growing external debt, rising yields in advanced economies and drop in commodity prices. Outlook remains bleak if the following continue, growing debt, subdued commodity prices nd tight global Monetary policy conditions. Ease Monetary Policy and subdued demand cause lending and deposit rates to fall. In the third quarter of 2018, liquidity eased compared in the second quarter following the Bank of Zambias move to maintain ease monetary policy. In general in tests rates on deposits and low and dropped because of the subdued demand and elevated liquidity. However, yields on government securities rose due to fall in demand for government paper.”
Meanwhile, Dr Chileshe said the Kwacha would depreciate if policy intervention was not taken quickly.
“Total debt has risen by a constant average growth rate of 15% per year since 2008. However, going forward, we believe credit growth will remain subdued because of expected pick up in inflation, higher non-performing loans, high arrears owed to suppliers but plans to reduce arrears can tremendously improve credit growth. Zambian Kwacha to remain largely stable in short term but likely to depreciate in 2019 if policy intervention is not taken quickly enough. Risks to exchange stability include; higher holding of domestic assets by foreign investors. Rising external debt to constantly create room for rumours and it’s adverse effects and rising crude oil prices,” said Dr Chileshe.