Zambia’s currency went into freefall on Monday as prices for its copper exports hit a one-month low, feeding fears that mining giant Glencore might further rein in its extensive operations there.
The kwacha was down more than 17 percent against the dollar at one point, its biggest one-day fall on record, further hampered by a rating downgrade from credit agency Moody’s that the government criticised as unsolicited.
“We have a double-whammy, meaning copper prices continue to soften, and production targets are really at risk because of the Glencore news,” said Kevin Daly, portfolio manager at Aberdeen Asset Management in London.
Glencore’s Mopani Copper Mines is the second largest employer in Zambia after the government, but fears over the mining and trading company’s ability to withstand a prolonged fall in metals prices sent its shares tumbling 25 percent on Monday.
Moody’s, which cut its sovereign rating to B2 from B1 on Friday, said it expected Zambia’s fiscal and debt positions to worsen, and Daly said on Monday it might now have “little choice but to turn to the IMF”.
Moody’s only assigned unsolicited sovereign ratings “when confident that we have sufficient information and after careful consideration of the usefulness of the rating to the capital markets,” spokesman Peter Griffiths told Reuters.
“Importantly, a sovereign rating provides an analytical benchmark for ratings of other issuers in the country, such as banks or corporates.”
The International Monetary Fund said in May that Zambia’s economy was at risk from budget imbalances, lower copper prices and policy uncertainties. Finance Minister Alexander Chikwanda told Reuters this month the economy was likely to grow less than 5 percent this year, undershooting a 6 percent forecast.
The kwacha, which has halved in value over 18 months, fell as low as 12.69 to the dollar at around 1225 GMT on Monday before steadying to 12.56, still down 16 percent on the day. Zambia’s central bank declined to comment on Monday’s slide.
Zambia’s central bank said it would not immediately comment on the kwacha’s slide.
Zambia’s dollar-denominated Eurobonds fell as much as 1.2 cents across the curve to record lows.
The 2022 issue and the 2024 bond weakened by around 1 cent to 73.891 and 83.490 cents in the dollar respectively, according to Tradeweb data. The 2027 issue took the biggest losses, shaving off 1.232 cent to 83.018 cents. All were yielding well above 10 percent.
LAYOFF AND PRODUCTION CUTS
Mopani Copper Mines (MCM) last week notified the government it plans to lay off more than 3,800 workers, aiming to take 400,000 tonnes of copper out of the market to boost prices.
Three-month copper on the London Metal Exchange fell 0.6 percent on Monday to its lowest in a month, anticipating more weak data from top metals consumer China.
Aberdeen Asset Management’s Daly said Zambia was particularly vulnerable because around 70 percent of its foreign earnings came from copper.
“You could see a double-digit fiscal deficit very easily this year,” he said.
Zambian authorities said they were mindful of the need to maintain debt at sustainable levels, but the Moody’s downgrade “should be ignored because its correctness was not discussed with any authorised representative of the … government.”
Analysts suggested criticising Moody’s was ill-advised.
“A better way would be for Zambia to assure investors that they are taking steps to alleviate the rampant power crisis,” Irmgard Erasmus, Cape Town-based Zambia analyst at NKC African Economics said.
“The central bank will have to step forward and we also need some vocal concern from the government… We expect (the central bank) to tighten liquidity. Absent of that you will see panic-buying increase.”
Other foreign firms running mines in Zambia include Barrick Gold Corp and Canada’s First Quantum Minerals.