LUSAKA-(BT) With only K579 million in market liquidity as measured by aggregate interbank current account balance on 16 Jan, the kwacha markets do not have adequate cover to absorb K950 million of bills on offer today (17 Jan). Thin market liquidity position has been fueled by kwacha demand to fund tax obligations whose deadline was 16 Jan. Traditionally, the monthly tax payment window offers supports kwacha demand as players are expected to meet their obligations in local currency.
“We expect the Thursday’s auction under water, on insufficient market liquidity cover versus assets on offer,” the BT carried in a note earlier. Tax payments will deprive the auction of liquidity required to absorb the t-bill sale.
Most corporates were converting dollars to raise kwacha funding while the mines continue to remit mineral royalty taxes in foreign currency directly to the central bank. This latter move, Zambian lawmakers put in place to shore up foreign exchange reserves.
The Bank of Zambia – BOZ have been active in open market operations – OMO injecting liquidity in the system and did inject K457 million on 16 Jan to manage aggregate cash position.
The second auction for the year will be held on Thursday 17 Jan with K950 million on offer across the treasury bill tenors (3m-1yr). Expectations are that the sale will be 55% subscribed with yields unchanged from a fortnight with 1 year yielding 23.1289% and 9 month 21%. Swap rates however continue to reflect a 500 basis points (bps) higher credit risk spread suggesting kwacha treasury assets are overvalued.
Currency risk remains temporarily subdued as dollar demand from the agriculture and petroleum sectors offsets the kwacha demand for purpose of meeting taxation obligations. This has capped the kwacha in the 11.9 -11.95 band. Pressure on the kwacha is forecast to build up post tax season as they will be minimal support from demand fundamentals.