VZCZCXRO9592
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0865/01 2401155
ZNR UUUUU ZZH
R 271155Z AUG 08
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 6184
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 LUSAKA 000865 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV ZA
SUBJECT: KWACHA GENTLY SLIDES IN WAKE OF PRESIDENT'S DEATH 
 
¶1. (SBU) Summary: Zambia's economy remains relatively sound, 
despite foreign exchange market fluctuations immediately 
following news of President Mwanawasa's death.  Although the 
Zambian Kwacha has slipped slightly against the U.S. Dollar, 
it remains in line with historical averages.  The Lusaka 
Stock Exchange remained open all week, yet the All Stock 
Index continued to fall.  Zambian Government (GRZ) officials 
have reassured investors that Zambia's economic future is 
secure.  Nevertheless, markets may continue to reflect the 
uncertainty bred by forthcoming presidential elections, as 
well as possible GRZ fiscal irresponsibility.  End summary. 
 
 
¶2. (U) Minutes after Acting President Rupiah Banda announced 
President Mwanawasa's death on Zambian television on August 
19, the Zambian Kwacha (K) experienced a sudden slide in 
international currency markets, falling by K100 to 
K3,500/USD.  By mid-week, the currency fell another three 
percent, to approximately K3,600/USD, before adjusting at 
week's end to K3,535/USD.  Despite the recent weakening, the 
current exchange rate is stronger than the 12-month 
historical average of approximately K3,700/USD and well 
within the normal range of activity.  An economist at 
Standard Bank Zambia, a South African subsidiary, described 
the exchange rate as "a barometer for the sentiment of the 
international community."  She said Standard Bank "expects it 
to remain stable in the period leading up to the elections, 
barring any alarming development, which is highly unlikely in 
a politically stable country like Zambia." 
 
¶3. (SBU) Within hours of Banda's announcement, Finance 
Minister Ng'andu Magande sought to ensure international 
investors that the GRZ will continue to pursue 
market-friendly policies.  In an interview with Reuters, 
Magande insisted that the GRZ's macroeconomic policy will 
continue.  Secretary of the Treasury Evans Chibiliti made 
similar comments, assuring reporters that the GRZ is 
well-prepared to continue implementing Mwanawasa's economic 
agenda, and that the budget cycle will remain on track.  A 
private sector analyst suggested to emboff that the GRZ is 
keen to "steel investors' nerves" given that foreign 
investment in GRZ securities has risen to USD 257 million 
from practically zero in recent years.  Magande's interview 
with international financial journalists so early in the 
mourning period may also have served his presidential 
ambitions. 
 
¶4. (SBU) Zambia's equity market, the Lusaka Stock Exchange 
(LuSe), was less affected by the news of President 
Mwanawasa's death.  During the week ending August 22, the 
LuSe All Share Index (LASI) experienced a modest decline, 
closing at 3,663, twenty points below the August 15 level.  A 
LuSe broker told emboff that the recent drop is part of a 
decline that began earlier in the summer, when a large number 
of local investors floated their shares in order to obtain 
capital to compete in a highly-anticipated initial public 
offering of a telecommunications company, Celtel.  When 
Celtel's share price fell, in response to a financial report 
in July, local and international investors alike dumped 
equities. 
 
¶5. (SBU) The LuSe broker conceded that Mwanawasa's stroke 
also had some bearing on the LASI, which peaked at over 4,200 
in late June, with international investors expressing some 
concern about political uncertainty.  The drop in share 
prices, which roughly coincided with President Mwanawasa's 
stroke on June 29, suggests that investors reacted to the 
knell of Mwanawasa's ailing health--and the exchange bore the 
impact of market uncertainty--in advance of the President's 
passing away on August 19.  A United States-based private 
sector analyst told emboff that "institutional investors will 
take a 'wait and see' approach to treasury bonds and currency 
exposure." 
 
¶6. (SBU) Comment: Zambia's capital and foreign exchange 
markets seem to have absorbed the economic shock of the 
President's death without undermining the country's growth 
prospects.  Nevertheless, markets are likely to experience 
additional volatility in the lead-up to the presidential 
elections, particularly given strong levels of support for 
the populist presidential candidate Michael Sata, who built 
his 2006 campaign on a platform of anti-(foreign) investment 
and intolerance.  Additionally, GRZ discretionary spending is 
set to increase manifold in the year's fourth quarter, due to 
the unbudgeted costs associated with the state funeral and 
presidential election.  A recent GRZ pledge to increase its 
fertilizer support program by almost three hundred percent, 
an across the board salary increase for Members of 
Parliament, and the ruling Movement for Multiparty 
Democracy's potential (illegitimate) use of government 
resources on campaigning may further weaken Zambia's 
 
LUSAKA 00000865  002 OF 002 
 
 
macroeconomic performance and the GRZ's reputation for fiscal 
discipline. 
 
KOPLOVSKY