The Zambian investment environment has seen its challenges in the recent past, primarily due to structural and political changes in the country. Total Foreign Direct Investment (FDI) this year has seen a 50% decline from the end of 2018 through to the first half of 2019 while GDP projections have been at their lowest in the past decade. This trend is set to continue as economists have again forecasted a 2.2% in GDP growth[1] for the coming year. This outlook is only a minor increase from the previous year and the lacklustre performance is due to inconsistent fiscal and private sector policy combined with inefficient debt management.
Zambia is experiencing difficult economic times lead by crippling debt and incessant power outages which continue to hamper economic development. This is all combined with an increase in the lending rate imposed by the MPC (Monetary Policy Committee) to 11.5% (an increase of 125 basis points) to stop inflation and curb the depreciating kwacha. All these factors have had a significant effect on the investment environment in Zambia.
Investor sentiment
As mentioned above, investor sentiment in the economy has seen a precipitous decline in the form of FDI through the first half of 2019. There are a number of factors that have contributed to this; during his opening remarks at the 2019 dissemination workshop of the foreign private investment and investor perceptions survey results, Governor of the Bank of Zambia, Dr Denny H Kalyalya, highlighted some of the significant reasons Zambia has not seen much foreign inflow of investment.
“FDI flows fell by almost 50.0 percent to about US$560 million in 2018. This significant decline was mainly due to losses of almost US$340 million, mostly in the mining sector where some companies encountered operational challenges. This was in contrast to retained earnings of about US$650 million recorded in 2017. As a result of declining profitability, borrowing from foreign affiliates increased to about US$640 million in 2018 from US$560 million in 2017. This contributed to the increase in the stock of private sector external debt to US$14.0 billion in 2018 from US$12.8 billion at the end of 2017.”[2]
In his speech, the Governor, stated that in 2018 and through the first half of 2019, circa USD275 million of foreign investment was allocated to the manufacturing sector. This however represented a decline of 21% over the previous year. Deposit taking institutions were the second highest recipients of FDI with a total of USD160 million. The third and fourth largest recipients of FDI were mining, information, communication and technology sectors which recorded receipts of USD130 million and USD120 million respectively. Overall, the governor noted that despite the decline in investor sentiment and inflows, investor perception remained upbeat due to “peace and security, political stability, relatively stable macroeconomic environment and the ease of doing business”, according to him these attributes featured prominently as the main motivating factors for investing in Zambia.
The case for Venture Capital and Private Equity
The macroeconomic metrics provide for an interesting opportunity in the alternative asset management industry in Zambia. With the key lending rate to 11.5%, we will begin to see further tightening of lending activity amongst the commercial banks in the market where lending rates in local currency are above 20%. This will deter SMEs from acquiring the necessary funds needed to scale up their operations as the high lending rates will restrict their growth. This is where Zambian Fund Managers should press the advantage. They can benefit from this opportunity by creating financial products and strategies that best fit the funding needs of the SMEs.
These companies in need of scale up capital can gain access to long-term funding solutions from alternative asset managers as opposed to commercial lenders whose lending rates often have immediate deleterious effects on their operations. What these SMEs need, combined with investment is a “value-add strategy” as part of a technical assistance framework to the company. The Fund Manager should oversee a significant amount of the restructuring of the business i.e. the establishment of governance structures and key departments within the firm that will further enhance their operations. There are very few Fund Managers on the Zambian market that fully understand the value of this investment approach.
Shortfalls facing Zambian alternative asset managers
Fund Managers face a number of hurdles when investing in the Zambian environment. The crux for the year 2019 has been fundraising. It has become increasingly difficult for Fund Managers to raise capital for investment into the Zambian economy primarily due to aforementioned reasons; dismal economic performance on the back of rising debt levels and the lack of consistent fiscal policy.
There are, however, a number of investor groups that Zambian Fund Managers should tap into in order to solicit capital to invest into SMEs. These investor groups need to take a leading role in engaging with Fund Managers to build SMEs that will be the conglomerates of the future.
Development finance intuitions (DFIs): These outfits face restrictions in the amount and type of funding they can deploy to SMEs. Most of these institutions have high ticket investment thresholds which do not cater to SMEs. They also face limitations in providing working capital finance to these companies due to the higher risks involved. This is where the Fund Manager comes in – DFIs have “fund of funds” initiatives that invest in alternative assets that are experts in handling risky investments such as those required by SMEs. DFIs should be more active in identifying Fund Managers that have this expertise and are able to select investments/projects that fit right in with their development initiatives.
High Net worth Individuals (HNWI): Affluent Zambians present both locally and in the diaspora who are unaware of the opportunities inherent in the investment community concerning Venture Capital and Private Equity. Awareness should be created amongst these individuals of the existence of this type of product which they can benefit from due to its novelty and investment horizon. Zambia will have to, with the help of the necessary regulatory bodies as well as Fund Managers themselves, promote this product to enlighten some of these groups of the benefits of investing in such a product. The Lusaka Stock Exchange is one such regulator that is trying to bring local Zambians to understand the value of investing in the stock market and various Trusts as well as informing SMEs of the value of listing their companies on the Alternative Exchange.
Pension Funds: With their vast amount of retiree assets, pension funds are key members in the investing community. These investors are well suited for the alternative asset management industry as their long maturity requirements fit well with the length of the investing period of a VC/PE fund. Regulated by the (PIA) Pension and Insurance Authority, pension funds are required to invest 2% of their total assets under management in CISs (collective investment schemes). It is imperative that Pension Funds consider alternative asset management as a product to invest into SMEs.
The investment environment in Zambia, given these challenging times, has seen a reduction in propensity and sentiment leading to a decline of 50% in FDI due to economic and political headwinds that have hampered growth. These economic hardships have led to the increase in the MPC to 11.5% which has effectively tightened lending activity and put local funding out of reach for SMEs. Despite these challenges, there are plenty of opportunities for alternative asset managers to step in and to provide the necessary funding and technical assistance to SMEs and push them into added value businesses and product lines. Zambia is a safe and peaceful country; local and foreign investors are allowed to own their investments and property outright and to expatriate dividends. It further benefits from a geographical location with eight neighbours in a region that has very favourable demographics.
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