The currency is Africa’s red metal hostspot Zambia is feeling coronavirus pandemic effects as asset sell-off pressure builds in Africa with a reported case in Nigeria. Global markets are bearing the brunt of the Covid-19 virus as more and more players flee risky assets to seek haven in safer bets such as gold and US treasuries. This has seen the worst impact on financial markets since the 2008 financial crisis. Emerging and frontier markets have been experienced disinvestment pressure as more and more fund managers exit emerging market positions fleeing to traditional safer haven assets such dollar denominated bonds and gold.
Steep weekly loss streak. Having opened the week at 14.65 levels the Kwacha has shaved over 3.4% to a record 15.3, the highest seen since May 2019. Other drivers of currency weaknesses are the agriculture input funding needs through poorly executed deals (letters of credit) by the authorities that mature simultaneously and shock the market with conversion pressure in a liquid thin market which in turn exacerbates further pressure on the local unit.
Persistent dollar demand. Zambia’s currency woes are triggered by dollar demand fundamentals for petroleum, agriculture and external debt service in a lean foreign exchange reserve environment leaving the central bank with little ammunition for price stability purposes exposing the economy to external shocks. The copper producer was downgraded by global rating agency Standards and Poors on 21 February to CCC with negative outlook from CCC+ with stable outlook sending its dollars bond spreads wider.
Debt repricing risks are high. In addition to currency risks debt repricing risks are elevated as the Kwacha interest curve remains steep reflecting fiscal posture. Inflation spiraled 140bps wider to 13.9% on 27 Feb according to Zamstats release narrowing compensating premiums on players with appetite for government risk.
The Kwacha Arbitrageur
