Amidst a third COVID19 wave characterized by a deadly delta variant, players continue seeking silver-linings on the edge of the pandemic cloud thicket in Africa’s copper producer, Zambia. Despite grappling with a default dollar debt position after skipping coupon payments, the Southern African nation has continued to attract decent flows that have increased in momentum in the recent weeks fueling a 5-day straight local currency rally, last seen in May 2020 (14 months ago). The Kwacha has in this period posted 1.3% in gains against the dollar closing Tuesday July 20 trading session at 22.15/22.59 from Wednesday July 14’s 22.45/22.90 levels.
An array of factors continue to support the supply side of the dollar market key of which include increased offshore flows as investors seek yield in government securities. This is part of increased interest in emerging and frontier market assets as the globe remains funds awash following aggressive stimulus interventions and rising inflation in the west.
Processing of copper cathodes in Zambia. Copper price climb is changing the red metal producers exchange rate forecast from earlier projections.
Proceeds of dollarized mining taxes as metal prices trade at all time highs have continued to support the supply side which has given a boost to foreign currency reserves which has provided the central bank with ammunition for price stability through currency offloading on the open market as observed over the last week. The increased stock of dollar flows has absorbed significant pressure on the demand side through earlier reported foreign currency backlogs which posed disruptive to the normal course of business. The demand side however has continued to be suppressed by pandemic effects in part as evidenced by the manufacturing health sector gauge, the IHS Markit Purchasing Managers Index – PMI which has slid back into contraction at 49.3 (June) after a 26 month high of 51.0 (May) the first expansion in 2 years. Weak consumer recovery has continued to tame import growth as such the period has seen suppressed import demand.
Increased agriculture Non Traditional Exports – NTE exports continue to contribute towards dollar inflows as levels have reverted to slightly higher than pre-pandemic levels. According to the Zambia Statistics Agency – ZSA June report, exports from agricultural products rose 67.6% to a K1.5 billion (dollar equivalent) from K0.8 billion a year ago same period. Tobacco (15.6%), oil cake of soya beans (14.0%) and raw cane sugar (10.1%) were the top three revenue earners.
A Zambia Sugar employee cuts cane at Illovo’s subsidiary in Mazabuka in the Southern part of the copper producer. Raw cane was sighted as one of the top three export earners for the month of May according to the Zamstats report for June.
On July 08, the International Monetary Fund – IMF Executive Board welcome Kristalina’s Georgieva’s $650 billion Special Drawing Rights – SDR allocation to help boost nations fight against against COVID19. This proposal is now to be presented to an IMF Board of Governors for approval in August.
International Monetary Fund Managing Director – Kristalina Georgieva speaks on at the Africa Development Bank annual meeting on June 23.
Should this proposal be approved, the copper producer is set to receive a $1.3 billion ahead of the Extended Credit Facility – ECF for which talks have advanced. The bailout package finalization remains a precursor for successful debt restructure. These items of issue are some drivers of sentiment boost for Zambia.
The Kwacha Arbitrageur
