Election fever: Zambian Kwacha falls

Over the long term, so the theory runs, democracy brings stability to societies and economies as decision-making becomes more predictable and transparent. Africa’s recent experience suggests that, in the short term, the opposite can also be true.

Civil war followed Ivory Coast’s disputed election last November, and this year, one of the busiest electoral years since African states started to gain independence 50 years ago, pre-election market jitters and elevated government spending have sent currencies tumbling and bond yields soaring.

Zambia, Africa’s biggest copper producer and a relatively stable frontier market, has become the latest victim of the trend, with the kwacha falling to 5,025 to the dollar last month, its lowest in a year, ahead of Sept. 20 elections.

Increased government spending during the campaign has also pushed up yields on Zambian bonds, with 2-year debt costing 14.5 percent at auction last month, its highest in two years.

External factors such as commodity price fluctuations, inflation or the willingness of international investors to assume frontier risk are, of course, also playing a part.

Yet the price of copper, which accounts for 80 percent of Zambia’s exports, is only 9 percent off a February lifetime high. The kwacha also shed nearly 5 percent against the euro in August, suggesting its decline against the dollar is not merely a function of the global “risk trade”.

However, many analysts argue that Zambia should be seen differently from, say Uganda, whose shilling hit a string of lows in the run up to a February election before sliding further as inflation appeared to be surging out of control.

“Zambian inflation has been well-behaved and some of the concerns about east African currencies have been to do with policy confusion and miscommunication, which we haven’t seen in Zambia,” said Stuart Culverhouse, an economist at London-based brokerage Exotix.

PEACE DIVIDEND?

On a continent with a history of political violence and upheaval, Zambia’s record of predominantly peaceful politics since independence from Britain in 1964 should set it apart.

Unlike in Nigeria ahead of an election in April, there are no signs of wealthy Zambians cleaning out foreign exchange bureaux to build up a cushion of dollars and euros in case everything goes wrong on polling day.

“We don’t have a sure-fire winner but it’s predictable –unlike other sub-Saharan African countries where there’s considerable uncertainty prior to elections, which causes a run on your investments,” said Nema Ramkhelawan, a currency analyst at Rand Merchant Bank in Johannesburg.

Meanwhile, Kenya, east Africa’s biggest economy, has suffered Africa’s most severe pre-election financial jitters even though polling day is not until some time next year.

The Kenyan shilling is on the ropes, inflation is soaring into the upper teens and the reputation of the central bank is in tatters, largely because it decided to cut interest rates in January in the face of accelerating price rises.

That decision, which has since been reversed with a flurry of increasingly unconventional policy tweaks, was widely interpreted as a cave-in to political pressure for growth ahead of 2012 polls.

Instead, it has left the economy on a very unstable footing just as everyone from Nairobi housewives to New York investors are worrying about a possible re-run of the ethnic murder and mayhem that broke out after Kenyan elections in late 2007.