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“OPEN ECONOMIES, FDI FLOWS AND ECONOMIC DEVELOPMENT: AN AFRICAN PERSPECTIVE” By Caleb Fundanga

Governor - Bank of Zambia Presented at the GIC Conference on “Financial Interdependence in the World’s Post-Crisis Capital Markets”

Shanghai, China 11 January, 2010 1


CONTENTS I.

Background Information on Zambia

II.

Africa and the Global Economic Crisis: Zambia’s Perspective

III.

Open Economies, FDI Flows, and Economic Development

IV.

China and Africa

V.

Why Invest in Zambia?

VI.

Conclusion 2


1.0 BACKGROUND INFORMATION ZAMBIA Area: 752,614 sq km Population Estimate: 12.1 mil (2007) Independence: 24 October 1964 GDP: US $11,425.4 mil (2008) GDP per Capita: US $1,229.8 (2008)

DR Congo

Angola

Tanzania

ZAMBIA

Malawi Mozambique

Namibia Botswana

Zimbabwe South Africa

3


2.0 Africa and the Global Financial Crisis: Zambia’s Perspective •

On the whole, Africa has weathered the global financial and economic crisis relatively well, in sharp contrast to previous crises in the 1970’s (commodity price shocks) and 1980’s (debt crisis).

Although per capita GDP is expected to decline for the first time in the decade, Real GDP growth remained positive in 2009 and is likely to be higher than the 1%-2% growth forecast by the IMF in its October 2009 World Economic Outlook – compared to the 5.5% recorded in 2008.

Consumer price inflation, which rose to double digits in 2008 (11.6%) and 2009 (10.5%), is also projected to decline back to single digits in 2010 (7.2%).

Fiscal balances are estimated to have deteriorated in 2009 to a deficit of 4.8% of GDP from a surplus of 1.3% of GDP in 2008. However, projections for 2010 are that these deficits will narrow to 2.4% of GDP. 4


2.0 Africa and the Global Financial Crisis: Zambia’s Perspective •

In Africa, FDI flows rose from an annual average of US$6.6 billion during the period 1990 to 1999 to an annual average of US$20.7 billion during the period 2000 to 2008.

Although FDI flows remain relatively low in comparison to other regions, FDI flows to Africa (as a percentage of total flows) have been rising steadily from around 1.4% in 1990 to 5.2% in 2008.

The rise in FDI flows has contributed to stronger economic growth rates, which averaged 4.7% during the period 2000 to 2008 compared to an average growth rate of 2% during the 1990s.

5


2.1 The Zambian Economy Has Proved Resilient Table 1: Macroeconomic Indicators, 2004-2008 2004 Real GDP growth (%)

2005

2006

2007

2008

2009 (Prel)

5.4

5.3

6.4

6.2

5.7

6.3*

GDP per capita (US $)

515.1

654.9

908.1

1,024.1

1,229.8

1,045.2

Inflation endperiod (%)

17.5

15.9

8.2

8.9

16.6

9.9

4,670.94

3,454.71

4,142.75

3,845.77

3, 756.01

5,062.52

Appreciation (-) /Depreciation (+)in (%)

1.6

-26.0

19.9

-7.2

27.3

34.8

Comm. banks weighted lending base rate (%)

29.8

27.4

21.6

18.3

20.8

22.7

5.6

6.1

6.1

4.8

4.8

4.7

Average selling exchange rate (ZK/ US $)

Comm. banks ASR (%)

6


2.1 The Zambian Economy Has Proved Resilient Table 2: Trade Balance, Q1 2008- Q4 2009, in US $ millions 2008 Q1

2008 Q2

2008 Q3

2008 Q4

2008 Total

2009 Q1

2009 Q2

2009 Q3

2009 Q4*

Trade Balance

421.1

235.8

-183.9

-69.8

403.2

-65.5

-22.3

337.1

215.0

Exports (c.i.f)

1,318.6

1,441.8

1,206.7

909.8

4,876.9

691.8

889.7

1,316.2

1,344.9

Metals

1,147.2

1,216.2

925.6

711.7

681.7

1,010.4

1,048.2

Copper

1,035.5

1,126.1

856.2

666.4

656.8

943.0

984.6

Cobalt

111.7

90.1

69.4

45.3

24.9

67.4

63.6

171.4

225.6

281.1

198.1

208.0

305.8

296.7

-913.2

-1,225.9

-1,416.3

-999.9

-911.9

-979.1

-1,129.8

NTEs

Imports (c.i.f)

4,000.7

3,684.2

316.5

876.2

-4,555.3

543.5

531.0

12.9

148.2

-757.3

7


2.1 The Zambian Economy Has Proved Resilient Merchandise Exports (US$ millions), Jan 2005 - Dec 2009 620.0

520.0

420.0

320.0

220.0

120.0

Total Exports

Metal Exports

Non-Traditional Exports

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

Nov-07

Sep-07

Jul-07

May-07

Mar-07

Jan-07

Nov-06

Sep-06

Jul-06

May-06

Mar-06

Jan-06

Nov-05

Sep-05

Jul-05

May-05

Mar-05

Jan-05

20.0

8


2.1 The Zambian Economy Has Proved Resilient

Copper prices

Exchange rate (K/US$)

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

Nov-07

Sep-07

2,500.00 Jul-07

2,000.00 May-07

3,000.00

Mar-07

3,000.00

Jan-07

3,500.00

Nov-06

4,000.00

Sep-06

4,000.00

Jul-06

5,000.00

May-06

4,500.00

Mar-06

6,000.00

Jan-06

5,000.00

Nov-05

7,000.00

Sep-05

5,500.00

Jul-05

8,000.00

May-05

6,000.00

Mar-05

9,000.00

Jan-05

Copper price per tonne (US$)

Copper price and the Exchange rate (Jan 2005 - Dec 2009)

Exchange rate (Mid-rate)

9


2.1 The Zambian Economy Has Proved Resilient

LuSE Indicators, May 2005 - May 2009 5,000.00 4,500.00 4,000.00 3,500.00

3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 -

Series2

10


2.1 The Zambian Economy Has Proved Resilient Net Portfolio Flows and LuSE Index 8,000.00

4,500.00

4,000.00

4,000.00

2,000.00 3,000.00 -

LuSE Index

3,500.00

2,500.00 -2,000.00 2,000.00

-4,000.00

Net Portfolio Flows

LuSE Index

Oct-09

Sep-09

Aug-09

Jul-09

Jun-09

May-09

Apr-09

Mar-09

Feb-09

Jan-09

Dec-08

Nov-08

Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

May-08

Apr-08

Mar-08

Feb-08

1,500.00

Jan-08

-6,000.00

Dec-07

Net Portfolio Flows (US$'000)

6,000.00

11


2.1 The Zambian Economy Has Proved Resilient Chart 2: Foreign Direct Investment Flows - Zambia 1,400.00

1,200.00

US$' Million

1,000.00

800.00

600.00

400.00

200.00

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

12


2.1 The Zambian Economy Has Proved Resilient

2,250.00

100

2,000.00

90 80

1,750.00

70

1,500.00

60 1,250.00 50 1,000.00

Africa

Global and Developing economies

Global Foreign Direct Investment Flows (US$ billion)

40 750.00

30

500.00

20

250.00

10

-

0 2008

2007

2006

2005

2004

2003

2002

2001

2000

Africa

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Global

Developing Economies

13


3.0 Open Economies, FDI Flows and Economic Development •

In the wake of the global financial and economic crisis the efficacy of the market economy in general and the transformative power of financial markets, in particular, have been brought into question. In the post crisis environment, emphasis in the developed world has been on reforming the architecture (supervisory and institutional frameworks) of the global financial system. However, there are growing fears of trade protectionism, which has the potential to impair a robust global recovery. These fears are heightened by the inability to conclude the Doha Round of multilateral trade talks. One of the most striking features of the global economic crisis was the dramatic collapse in global trade and financial flows.

14


3.0 Open Economies, FDI Flows and Economic Development •

For developing countries, particularly in Africa, the post crisis environment presents quite different challenges to those being addressed by the developed economies. This is because Africa is emerging relatively well from the crisis: Real GDP growth for SSA is estimated to have remained positive in 2009, although GDP per capita is expected to have declined for the first time in the decade. Strong real GDP growth over the decade has largely been built on positive terms of trade, strong FDI flows, the expansion of regional and South-South trade, and sound macroeconomic management. GDP per capita has increase and poverty has declined.

15


3.0 Open Economies, FDI Flows and Economic Development •

Africa’s financial systems have, on the whole, have not been impaired due to the absence of “toxic assets”. This reflecting enhance supervision of both the bank and non-bank sectors, after the banking crises during the second half of the 1990s. In addition, financial systems remain unsophisticated and are dominated by the banking sector (e.g. in Zambia the banking sector accounts for over 90% of total assets of the financial sector). Consumer prices are also expected to fall back to single digits in 2010, after breaching single digits in 2008 and 2009 (commodity price shocks).

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3.0 Open Economies, FDI Flows and Economic Development •

From this strong macroeconomic perspective, the pre-occupation of many African economies is achieving much higher levels of economic growth by expanding the reach and promise of the market economy. This includes:

A focus on financial inclusion that expands the reach of the financial sector and the growth of debt and capital markets. In countries such as Zambia, only 33% of the population have access to financial products

Developing more sophisticated financial products as well as the payment system infrastructure

17


3.0 Open Economies, FDI Flows and Economic Development •

Bridging the rural-urban divide by providing infrastructure critical for the development of markets and institutional structures that raise rural productivity and incomes

•

Deepening regional integration and expanding regional markets through infrastructure development as well as lowering the cost of doing business.

•

Fro Africa, maintaining open economies and encouraging increased FDI flows from diverse sources, is thus essential to the fight for economic emancipation and poverty reduction.

18


4.0 China and Africa •

Over the past decade china has become an increasingly important partner in Africa’s development – as a key source of FDI flows as well as providing a growing export market for African exports

Chinese FDI flows to Africa have been rising steadily, from an amount of US$20.0 billion during the period 1990 to 1997 to US$120.0 billion during the period 1998 to 2002.

The initial focus has been on investment in the extraction of primary commodities that meet china’s growing domestic requirements. However, a more promising development has been the recent drive in countries like Zambia to invest in value added processes that seek to exploit regional markets.

19


3.0 China and Africa •

Since 2000, Chinese investments in Zambia have risen steadily to over US$1.0 billion in 2009 (estimate).

The importance of Chinese FDI flows to Zambia is evidenced by the relatively large share of Chinese FDI pledges to total FDI pledges to Zambia at 31% between 2000 and 2009.

In terms of distribution, Chinese FDI is spread across the following major sectors of economy: Mining; Manufacturing; Construction; Tourism; Agriculture; Services (retail trading and wholesale);Finance; Transport; and Real Estate.

The spread of Chinese FDI to major sectors of the economy is important as it is likely to contribute significantly to the diversification of Zambia’s export base and sustained economic growth and development. 20


5.0 Why Invest in Zambia? •

The achievement of relative macroeconomic stability, coupled with sustained real GDP growth rates registered in recent years, have created a conducive environment for investment in Zambia.

Zambia’s strengths as an investment destination are further enhanced by:

Strategic location, with 8 neighboring countries;

Strong regional linkages, through road and rail networks;

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5.0 Why Invest in Zambia (contd…) 

Growing population, and access to a potential population 170 million from neighboring countries;

Relatively high and growing literacy levels – 81% of total population;

Abundant natural resources (land and water reserves);

Abundant minerals (copper, zinc, lead, coal, gold, silver, uranium).

22


5.0 Why Invest in Zambia (contd…) •

Among the sectors that offer investment opportunities include: Banking; Agriculture; Tourism; Mining; manufacturing; and Energy.

If Zambia is to unlock its potential, the international and local debt and capital markets will play a significant role

In the energy sector, for example, Zambia has a comparative advantage in the Southern African (SADC) region as she possess some 40% of the regions water resources , and has a potential generating capacity of some 6000MW.

This region requires additional annual capacity increases of 1,200MW if power shortages are to be avoided. Zambia itself needs additional annual capacity of 150MW.

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5.0 Why Invest in Zambia (contd…) •

In Zambia projects generating approximately 4,000MW have already been identified, with a total investment cost of US $8.5 billion Partners in some of these projects include the China (SINOHYDRO, Kariba North Power Station); India (TATA, Itezhitezhi and Kabompo Gorge) World Bank (Transaction Advisor on Kafue Gorge Lower)

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5.0 Why Invest in Zambia (SADC Regional Power Grid)

25


5.0 Conclusion

•

A successful “African Renaissance� in a post crisis world is thus based on harnessing the power of global interdependence, exemplified in the 21st century by deeper and more diversified trade and capital flows, and a smarter leveraging of the market economy and the power of the financial sector to promote growth and economic development.

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END

THANK YOU

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Bank of Zambia Jan 1010  

Shanghai, China 11 January, 2010 Presented at the GIC Conference on “Financial Interdependence in the World’s Post-Crisis Capital Markets” B...

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