The central bank in Africa’s copper producer Zambia, on 23 August 2023 raised its policy interest rate for the third time in the year by 50 basis points to 10.0%. This decision was arrived at given rising price pressures as the Southern African nation foresees environmental headwinds in bad weather expected to dent agriculture production and power generation. Inflationary pressures remain persistent with a climb in July inflation that headlined 10.3% outside the Bank of Zambia target range of 6-8%. This announcement signaled to economic fragility and macroeconomic instability.
The central bank monetary policy communique was express about inflation expectations staying outside the target band for 7 quarters 1H25 and will in the interim reverberate between 9.3% – 10.2%.
FOURTH QUARTER COST PUSH EFFECTS
We project FY23 inflation to close the year between 11% to 13% as food prices remain elevated on account of a forecast acceleration in 4Q23 to 1Q24 as grain shortages weigh. Foreign exchange pressures are expected in 4Q23 fueled by widened dollar demand from manufacturers and suppliers requiring to liquidate their international supplier credit balances by November in addition to general festivity spend. Cyclically, another major dollar demand driver will be fertilizer purchases to support the traditional Farmer Input Support Program instrumental in the copper producers food security initiative.
As the Zambian economy recovers, trade data continues to show record consumer imports exceeding $300 million a month for the first time in history. This remains a contributor to the Kwacha being on the back foot.
In addition to this, the central bank sold 22% less dollars onto the market in 1H23 an intervention into supply constraints on account of 51% lower mining tax collections as production at start of year was hampered by excessive flooding in North Western Zambia and Durban ports coupled with frail Chinese economy recovery that made it unattractive for mining companies to increase supply.
London Metal Exchange copper prices are expected to hit record levels by 2025 onwards when smelter capacity increases materially in India, China and Indonesia as these nations build capacity for the electric vehicle demand. This sets the base case for year end inflation projection.
With a volatile FX, higher-than-expected inflation and sluggish economic growth investors are advised to retain the stagflation portfolio comprising medium term government securities (1-5 year bonds), equities with pricing power, strong cashflows and dividends. Another good portfolio mix would be 5% to 10% holdings in wealth insurance assets such as US treasuries or gold.
LOWER COPPER OUTPUT AND EL-NINO WEATHER
Zambia is expected to grow 2.7% this year a sharp decline from FY22 growth as the red metal grapples with 10% lower copper production and will experience El Niño weather affecting agribusiness and power generation. This was according to the Medium Term Expenditure Framework 2023-2026. The Southern African nation has to complete a critical debt restructure process whose complexities continue to breed uncertainty and weariness in market players. Until private graded credit is renegotiated, Zambia’s long term issuer rating on foreign currency will remain default. Moodys rating agency last week upgraded the copper producers local currency long term issuer rating to Caa3 from Ca citing the bilateral debt treatment attained under the G20 common framework.
Despite the hurdles the Southern African nation faces, risk appetite to some degree has continued to seep through the market.
The Kwacha Arbitrageur
