FACTBOX-Key political risks to watch in Zambia

Reuters

Zambia faces widening strikes, increased state spending that could drive a hole in the budget and greater state involvement in the economy that could increase worries about the course of Africa's biggest copper producer.

The government - in place since September - has angered its political foes with probes into corruption by the previous administration and may find it difficult to push laws through parliament in the face of an increasingly united opposition.

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Investors have also been rattled by a doubling of base metal royalties in the November budget, while frequent power shortages look set to worsen problems for mining companies.

The country's power hungry mining firms face short supply, with the government estimating generation capacity will not exceed projected demand until 2015.

Erratic rains have delayed the planting of this year's maize crop, the country's staple, raising the possibility of a poor harvest and rising food prices.

STRIKE SEASON

Most mining companies concluded negotiations with unions for better pay and working conditions, but the likelihood of disputes remains in other sectors and government departments.

President Michael Sata, who swept to power last year on the back of promises to spread the benefits of mineral wealth, asked unions this month to keep salary demands close to inflation, which slowed to 6.4 percent in January.

But after years of what they regard as paltry pay, many unionised workers want more and may target foreign-owned mining firms for more money.

What to watch:

- Strikes spreading beyond mines to other sectors

CORRUPTION

In line with his strong anti-corruption pledges, Sata has closely reviewed deals done under his predecessor, Rupiah Banda, who he criticised for allowing graft to proliferate.

Sata has appointed an anti-corruption chief and in December police charged a former minister with receiving stolen property after 2.1 billion kwacha ($414,000) was found buried at his farm.

Zambia is investigating the 2007 sale of a 49 percent stake in state-owned Zanaco Bank to Rabobank, in yet another case that could see a reversal of a deal involving foreigners.

It has also said it will take full control of fixed-line operator Zamtel from Libyan owner LAP Green Networks after an inquiry in November ruled the 2010 transaction illegal.

However, the clean-up has sparked accusations of an anti-Banda witch-hunt, potentially becoming the cement that unites the two main opposition parties, which, if put together, have a slender parliamentary majority over Sata's Patriotic Front (PF).

In an apparent effort to consolidate his position, Sata in December made three opposition members of parliament junior ministers, prompting an outcry from their party which accused him of trying to weaken the opposition.

What to watch

- Opposition MPs joining ruling party

- More arrests of ex-government leaders

FISCAL DISCIPLINE

An expansive 2012 budget included big increases in social spending and farming subsidies to be paid for by a rise in mineral royalties and a debut Eurobond.

Finance Minister Alexander Chikwanda said in December the government planned to increase the size of the issue to $700 million from $500 million due to strong external appetite.

Although higher mineral royalties should raise revenue in the short term, Zambia may be forced to tweak the rates if copper prices fall. Turmoil in the euro zone also casts doubt over the plans for the Eurobond issue.

If worsening economic conditions make it difficult for Sata to make good on promises of giving Zambians more disposable income, analysts say he may start to put more of a squeeze on foreign investors.

His administration has already approached the World Bank for finance, saying foreign aid and domestic funding was not enough to build the infrastructure needed to underpin economic growth.

What to watch:

- Increased expenditure

- Statements suggesting policy shift

ECONOMIC NATIONALISM

Despite some investor nervousness, Sata is unlikely to go down the path of radical resource nationalism and fiscal recklessness, analysts say.

Finance Minister Chikwanda has said Zambia will not re-impose a minerals windfall tax, and Mines Minister Wylbur Simuusa told Reuters in December the new mineral royalties could be rolled back if copper prices collapse.

However, Sata may reverse mining and other deals that are found to have been corruptly agreed under the previous government.

Zambia has attracted huge amounts of foreign investment, mainly in mining, from emerging economies such as China but many Chinese companies have been hit by strikes over poor pay and conditions since the change of government.

Sata met Chinese diplomats and investors shortly after his election to try to ease tensions, but he also made clear that the Chinese companies that have ploughed more than $2 billion into the mining sector would not get preferential treatment.

Amid concerns about copper exporters misreporting the quantities leaving the country, he has tightened loopholes, ordering all export payments be routed via the central bank, with new rules due to start in the first quarter of 2012.

What to watch:

- Reversal of deals agreed with the government

(Editing by Jon Herskovitz)

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