Compendium of 2001 LuSE Market News

January | February |

-February-

23rd February 2001 

Chilanga Update

There has been a bit of a delay in progressing the mandatory offer to the minority shareholders related to the foreign exchange "guidelines" published by the Bank of Zambia a couple of weeks ago. Since the underlying transaction between CDC and Lafarge that triggered the mandatory offer was concluded in USDollars, the offer was going to be made in USDollars to the minorities. The Bank of Zambia has indicated that the offer must be made in Kwacha and it has undertaken to provide a forward contract in order to eliminate any exchange exposure or risk. This leaves open the issue of those offshore shareholders who may wish to accept the offer and whether they will have to take Kwacha and then purchase the USDollars in the market, or simply transact in USDollars. We are following up this issue with the BOZ and will report on it once we have an answer.

Zambia Sugar Update

The Illovo team has been in Zambia for the past ten days completing their due diligence on Zambia Sugar. We have been advised that it has gone well, but there has been no word yet as to whether there will be any price adjustments as a result of the exercise.

Rothmans Internal Re-organization

Several weeks ago, Rothmans published a Cautionary Notice regarding the Board's review of a possible internal re-organization of the business, something that has been long overdue. We have been advised that an announcement to this effect is likely to be forthcoming during the course of the next week and we will advise you accordingly.

16th February 2001

Tate & Lyle Sell Interests in Zambia Sugar to Illovo Sugar

In an announcement released simultaneously in London, Johannesburg and Lusaka, Tate & Lyle informed the markets that it had signed an agreement with Illovo Sugar of South Africa under which Illovo would acquire Tate & Lyle’s 50.87% shareholding interest in Zambia Sugar for a total cash consideration of US$ 11.4 million.  (At today’s rates, this is approximately Kw 15 per share).  The transaction is subject to the following conditions:

Illovo is the leading sugar and downstream products company in Africa with operations in South Africa, Malawi, Swaziland, Mauritius, Tanzania and Mozambique. It also produces sugar from beet in the U.S.  As a result of this change in control, Illovo will be required to make a mandatory offer to the minority shareholders.  This will come immediately after Illovo’s due diligence review which is expected to be completed within two weeks time.

-January-

26th January 2001

Minister of Finance 2001 Budget Presentation: “Stay the Course”

On Friday, the Minister of Finance, Dr. Katele Kalumba presented his 2001 budget to Parliament. His macro-economic targets for the year seem prudent, almost conservative, and, with the exception of some minor modifications to the existing tax regime, there were no significant reforms
or changes proposed. The clear message seems to be that with the major and sometimes difficult reforms that have been implemented over
the past nine years now behind us, it is time to pause, breathe a sigh of relief and get on with the business of growing the economy in the context of the now fully implemented and well-defined macro-economic liberalisation programme. There is a clear emphasis on the much discussed and debated Poverty Sector Reduction Programme (PSRP) and, notwithstanding the recent, rather disturbing announcements on exchange “regulations”, the Minister was at pains to re-emphasize the fact that the government has absolutely no intentions of re-introducing exchange controls in any form—more on this later.

While we would have liked to see the introduction of more investment-oriented incentives—e.g. a reduction in corporate income tax for listed companies, investment guidelines for pension funds and the insurance industry, and the reduction or elimination of withholding tax on dividends and interest payments from listed companies—we do have to say that the new budget is “neutral” with regard to investors. Good news for the brewing industry—especially Zambian Breweries—is the fact that the oppressive 100% excise tax on clear beer has been reduced by 15% to 85%. The extensive lobbying by Zambian Breweries over the past several is beginning to pay off, albeit in a small way thus far and we anticipate that this reduction will have a demonstrably positive impact on ZAMBREW’s bottom line earnings. (Note: We are in the process of completing an interim research report on ZAMREW that should be ready before end-February.)

Below we have summarized actual macro-economic performance against the original—and, in the case of inflation, and the fiscal deficit as a percentage of GDP, revised—targets for the year 2000:

Targets Original Revised Actual
Real GDP Growth 4.0% -- 3.5%
Inflation 14.0% 19.0% 30.1%
Budget Deficit as % of GDP 1.3% 2.3% 2.3%
Gross FOREX Reserves  Above US$ 100MM -- Just Over US$ 100MM

The objectives for 2001 are to attain:
- 5% growth rate in GDP
- 17.5% year end inflation
- domestic fiscal deficit of .75% of GDP
- an increase in reserves of US$ 150MM—i.e. over US$ 250MMin total

If the government is able to “stay the course” and maintain business and investor confidence, these are all achievable targets.

Some of the key points in the 2001 budget include:

Income Tax
Individual tax credit increased to K 1,440,000 per annum and tax bands widened. Thin capitalization provisions to be strengthened. Allowable deduction for pension contributions increased to K 180,000 per annum.  Insurance companies—excess of management income over investment income to be treated as loss.  Basis on which penalties are charged on understated provisional tax to be amended.

VAT
VAT Deferment Scheme re-introduced on qualifying goods.  Hotel accommodation in Livingstone district to be zero-rated for two years.  Interest in hire purchase to be treated as taxable supply for VAT purposes.

Customs and Excise
Reduction in excise duty on clear beer (by 15% from current 100% down to 85%) and opaque beer (by 15% from current 50% down to 35%). Duty on malt extract for concentrates for food preparation is reduced from 25% to 15%.  Minimum threshold for duty on saloon cars and commercial vehicles is increased from Kw 1.0MM to Kw 2.0MM. Duty on wires of iron or non-alloy steel reduced from 15% to 5%.

As is evident from the above, other than some “tinkering” around the edges, there are no substantive changes in or modifications to the existing tax legislation. Of major concern to the business and investor community, however, were the recent announcements on the introduction of certain measures designed to help stabilize the Kwacha. During the past week, the Bank of Zambia did issue “guidelines” to the commercial banks which were really nothing more than a repetition of the Minister’s pronouncements of the previous week. Needless to say, these guidelines have raised as many questions as they have answered. That said, the announcements and guidelines have had their intended effect—at least in the short term—in that the Kwacha has strengthened and closed the week in the Kw 3800 = US$ 1.00 range. As we reported last week, there is absolutely no legal basis for the introduction of any form of controls and, interestingly, during a post-budget breakfast session widely attended by the business community and selected government officials, the Deputy Governor of the Bank of Zambia (who, candidly, was unable to provide any clarification to some very pointed questions regarding the guidelines) stated that the measures were of a temporary nature only and would be reviewed as time goes on to determine the need for their continuation. At this juncture, one certainly gets the impression that these measures were introduced merely as a “shock” tactic to try to generate an immediate reaction and modification in behavior regarding foreign exchange dealings. If this is the case, certainly, in the short term, they have met with some success. The real question is whether they are sustainable. For the time being, at any rate, there does not seem to be any intent of the government to attempt a re-introduction of exchange controls of any nature.

So, basically, as we indicated at the outset, a budget that gives a “stay the course” message; no major modifications to existing tax or other legislation, and modest/achievable macro-economic targets.

Notwithstanding the above, we do believe the budget is a rather “fragile” one that could get de-railed. Of the Kw 5.015 trillion budget (which, if met, will result in a Kw 98.1 billion deficit), fully Kw 2.604 trillion, or 52% is expected to come from external assistance—i.e. donor support in one form or another. One of the cornerstones of the donor programme (in addition to the development of the PSRP) has been good governance. This is an election year, with national elections scheduled for November. Recently there has been much debate about the possibility of a third term for the President, and changes in the constitution in order to permit it. While in the past, the President has been quite categorical about not seeking a third term, and has so stated in very public and highly visible fora, of late he has been remarkably silent on the issue; and the debate rages on. One can certainly envisage a scenario in which he simply states that he must “succumb” to the will of his people and, by not making any recent statements about his intentions, he certainly seems to be leaving the door open for such a possibility. Clearly, such a move could have a very damaging effect on the government’s currently warm relationship with the donor community and any curtailment in the anticipated flow of donor support could render the inflation, growth and fiscal deficit targets utterly impossible to achieve. We leave you to draw your own conclusions.

Please contact us directly for more details on the provisions of the Minister’s 2001 budget.

Chilanga Cement: Share Trading Suspended

Friday was a busy day. After meeting with CDC officials regarding the pending acquisition of Pan African Cement Limited by the Lafarge/Blue Circle joint venture, the SEC and the LuSE suspended trading in Chilanga Cement shares effective 26 January—the same day. Readers will
recall that in September 2000 CDC had transferred into Pan African Cement (a wholly-owned subsidiary domiciled in Mauritius) its shareholding interests in Chilanga Cement (50.1%), Portland Cement in Malawi (75.6%) and Mbeya Cement in Tanzania (52%). This was in advance of an apparent strategic move to sell its interests in the cement industry in East and Southern Africa. This was followed in short order by the announcement of a deal for the holding company with a joint venture between Lafarge and Blue Circle.

In the circumstances, CDC had requested a waiver to the mandatory offer provisions of the Securities Act in Zambia (triggered by the pending change in effective control of Chilanga from CDC to the Lafarge/Blue Circle joint venture). We understand that a condition to concluding the
transaction imposed by Lafarge/Blue Circle was securing this waiver from the SEC. The SEC rejected the waiver request and instructed Pan African Cement to proceed with the general offer. Given the relatively illiquid market, and the possibility of a false market being created, the SEC and the LuSE decided to suspend trading until the full details of the offer are made known to the market.

In discussions with CDC, we understand that, notwithstanding the provisions of the sales agreement which specifies that a waiver to the mandatory offer is a condition to concluding the transaction, the new owners of Pan African Cement (Lafarge/Blue Circle) have agreed to proceed. We anticipate that the offer will be forthcoming during the course of the week or shortly thereafter.

19th January 2001

Declining Kwacha – Some Form of Exchange Regulations in the Offing?

The rapid decline in the value of the Kwacha over the past several months has resulted in discussions about some form of exchange regulations. In meetings at State House over the past two weeks between the President and his senior advisors on the one hand, and members of the business community (almost exclusively foreign-owned and/or controlled businesses) on the other, the President has placed the blame for the rapid fall in the Kwacha squarely at the feet of these businesses. At a time when USDollar deposits in the commercial banking sector continue to rise, the Kwacha has continued to fall. In large part, this has been due to the fact that increasingly, transactions are being concluded in USDollars; companies earning USDollars have been paying suppliers in USDollars and only a small percentage are being sold into the market.

Last evening, the Minister of Finance announced that going forward several measures would be introduced with the intent of arresting the depreciating Kwacha. These include; i) requiring all domestic transactions to be concluded in Kwacha, ii) requiring exporters to retain 75% of their foreign exchange earnings in Zambia, and iii) requiring all external payments above US$ 5,000 to be channeled through commercial banks,
among others. In addition, he stated that businesses would still be able to hold foreign currency deposits, but there would be limits on the amounts.

To date, we have seen nothing relating to the repatriation of dividends and/or capital to foreign investors.

Not surprisingly, the announcement has raised more questions than it has answered and the business community is in a state of some confusion as to exactly what the implications of the announcements are or will be. The Minister concluded his announcements by stating that
Government had no intention of re-introducing exchange controls. There has been no comment yet from the World Bank, IMF or donor community in general.

We are awaiting some formal communication from the Ministry of Finance and the Bank of Zambia to get a better understanding of these new regulations and will pass them along as soon as they are made available.

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