Crude ‘bulls’ and Kwacha ‘bears’ could trigger a fuel hike

This is why we think the Zambian energy regulator could have a fuel price hike under their sleeves.

Crude markets are bullish of OPEC+: Crude markets are in a bullish mood with optimism around potential supply curb extension after March 2020. OPEC+ member states led by Saudi Arabia the de facto leader and Russia leading the non OPEC members are commencing deliberations on 05-06 December to agree on the future of crude. Preliminary indications are that a 228,000 – 400,000 bbls addition to the 1.2 million bbls daily could be agreed. This has caused a rally in the prices of crude with International Ice Brent benchmark trading at $62bbl while WTI U.S crude futures just shy of $57bbl.

The Kwacha has been very bearish: The Zambian Kwacha has been an a losing streak having touched all time lows of 14.75 for a unit of dollar after reversing some of its losses to settle at 14.55. Dollar demand to fund energy (electricity and oil imports), external debt service (dollar bonds coupons) and agriculture inputs (for FISP program) were the key drivers of weakness in the copper currency. Despite the central bank intervention in tightening monetary policy 125bps on the benchmark interest rate to 11.5% and 1,000bps on overnight emergency funding rate to 28% the Kwacha seems to be drawing a line in the sand. Reserved have ebbed low to levels of about 1.6 months of import cover to under one and half yards in dollars. This has made it difficult for the Bank of Zambia to intervene by selling dollars on the open market as they manage the risk of depletion even the little ammunition available at their disposal.

The regulators trigger level has been exceeded: The Energy Regulation Board (ERB) model focuses on two key variables in determination of fuel prices namely the international crude and currency pricing (exchange rate). And if the the two move to exceed 2.5% in trigger level then the committee has justification to adjust pump prices in either direction but most likely upwards because pricing has always been getting costlier generally. Despite crude being fairly at the levels at which it was when the September price hike was effected, the Kwacha has shaved over 14% value to trade at current levels and such is way over the 2.5% trigger which could be signaling an upward adjustment in crude in the next fuel review.

More inflationary pressure build: Zambia grapples with energy poverty and could be on the verge of a 75% tariff hike as soon as cabinet sits. This coupled with a potential fuel price hike will elevated the inflation environment which will not only weigh private sector pulse but could trigger tighter monetary policy which targets taming inflation.

The Brexit Consultant