Zambia Pharmaceuticals and Healthcare Report Q3 2012

The fundamentals of Zambias healthcare industry growth story remain strong with macroeconomic growth, returning international donations and government spending on healthcare forecast to drive pharmaceuticals sales. However, with Zambias currency depreciating rapidly in early 2012 and bipartisan tensions showing between the government and opposition, the countrys attractiveness for investment is currently being undermined by macroeconomic factors.

Headline Expenditure Projections

• Pharmaceuticals:

ZMK951bn (US$196mn) in 2011 to ZMK1,096bn (US$207mn) in 2012; +12.2% in local currency terms and +5.7% in US dollar terms. Forecast down considerably from Q212 in US dollar terms due to forecast depreciation and global macroeconomic headwinds

• Healthcare:

ZMK5,356bn (US$1.10bn) in 2011 to ZMK6,313bn (US$1.19bn) in 2012; +17.9% in local currency terms and +8.1% in US dollar terms. Historic data has increased slightly due to new numbers for the World Healthcare Organization. However, the countrys growth forecast is down due to currency deflation, macroeconomic headwinds and a lowered copper price forecast. Risk/Reward Rating:

In Q312, Zambia remained steady at 21st best market in the MEA region in BMIs proprietary Risk/Reward Ratings (RRR) matrix with a score of 39.6.

Key Trends & Developments

- According to local news sources the government of Zambia has issued ZMK345bn (US$66.3mn) for the health ministry in Q112. Health Minister Joseph Kasonde revealed that planned programmes for the funds comprise ZMK100bn (US$18.75mn) allocation for district grants and district hospitals, while ZMK23bn (US$4.31mn) will be spent on medical equipment. Moreover, the ministry will spend ZMK40bn (US$7.5mn) on infrastructure programmes and ZMK17bn (US$3.19mn) on staff-related debts, like gratuity for doctors and payments of settling allowances. Kasonde added that the ministry had raised an additional procurement of important drugs in the same quarter, which equals US$5mn.

- In February 2012, The Global Pharma Health Fund, a charitable initiative funded by Merck KGAA, announced it will donate five mobile pharmaceutical testing kits to the Zambian Health Minister. It developed so-called Minilabs consisting of two portable and tropic-resistant suitcases that contain the necessary equipment and reagents to detect inferior or ineffective medicines.

BMI Economic View

The Zambian kwacha, which was in a depreciatory trend over much of the past two quarters, has broken trendline resistance and remained relatively stable over the past several days of trading. This comes after a short bout of appreciation since the announcement of Zambias debut benchmark interest rate of 9.00%, which we believe has had a tightening effect on monetary policy (see March 30 Benchmark Policy Rate To Help Instil Confidence on our online service). At the time of writing, the currency was trading at ZMK5,240/US$, a level around which we believe it will remain over the near term.

Over a longer time horizon, we believe that the kwacha will face renewed downward pressure. The most important source of foreign exchange is copper export revenues, and the price of copper has fallen sharply over recent weeks, briefly dipping below US$8,000/tonne on April 16. The metal is currently trading at US$8,025/tonne, but BMIs Commodity team expects it to resume a downward trend through 2012, with an average price forecast for the year of US$7,600/tonne. This is below consensus, due in large part to BMIs Asia teams expectations of an economic slowdown in China, the worlds leading copper consumer. This view has already begun to play out, with Chinas Q112 growth of 8.1% coming in below consensus of 8.4% (see April 13, Growth Miss Bolsters Hard Landing Call).

BMI Political View

The controversial decision by Zambias registrar of societies to de-register the leading opposition party is a stark illustration of the rising political risk due to partisan rivalry. If President Michael Satas administration overreaches its authority, it could lose the considerable goodwill it gained from the electorate when it came to power in September 2011, as well as the confidence of foreign stakeholders.

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