The copper currency, the kwacha, gave September manufacturing pulse a positive cue as input costs ebbed. According to markit economics latest readings, factory activity as measured by the purchasing managers index firmed 0.5 points to 50.5 in the month of September supported by a firmer local currency. Fifty (50) sets the benchmark for expansion (>50) and contraction (<50).
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The copper producer on 31 August had its request for financial assistance with the International Monetary Fund approved. This sent the kwacha into a rally as sentiment widened with market players running short positions in anticipation of increased flows as they hedged their bets. Other drivers of stronger pulse include petroleum cost downward adjustment as the energy regulator eased pump prices on lower international crude and exchange rate pressures.
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“An appreciation of the Zambian kwacha against the US dollar in September was key to the strengthening of operating conditions over the month. Favorable exchange rate movements helped lead to a first reduction in purchase costs for ten months, in turn feeding through to lower overall input prices. With input costs down over the month, companies also lowered their own selling prices, ending a seven-month sequence of inflation. Price reductions helped to stimulate customer demand, leading to a renewed increase in new orders during September. The rise was the second in the past three months, albeit only marginal,” the report carried.
Downside risks to manufacturing pulse
Headwinds in the manufacturing space include the expiration of petroleum tax waivers on 30 September resulting in value added tax and other excise taxes scaling pump prices higher for October. Tax waivers expiry constitute a reorganization of Zambia’s fiscal purse to maximize economic production possibilities.
Currently, oil prices are settling around $92/bbl with the dollar trading for K15.79. The trajectory of the copper currency, until we resolve the creditor debt restructure quagmire in the wake of a chaotic global environment, could be bearish towards K15.85. A scenario analysis reveals a potential 2% increase in pump prices to K23.21 ruling for November.
Other drivers of firmer Brent prices are the recently held OPEC+ meeting that resolved to cut supply by a million barrels daily that is expected to keep prices within $95 to $100 a barrel and could scale fuel prices higher for Zambia between K23.90 to 24.85 in the festive season. These energy price risks could weigh both consumer and input inflation higher in the remainder of the year.
Versus peers – energy price risks persistent
Ghana’s PMI was negative at 45.6 (a 29 month low) as inflationary pressures continue to weigh while Kenya sharply rebounded to 51.7 (from 44.2) with greater certainty after elections are now out of the way. Worsening rolling blackouts sent South Africa lower to 49.2 (from 51.7) as Uganda stayed afloat at 51.6 (from 50.5). Energy price risks and inflationary pressures remain homogeneous persistent theme across African nations.
The Kwacha Arbitrageur