Covid vaccine hopes have allowed risk appetite to claw back into global markets as hopes for recovery in fuel demand slide back after a suppressed period occasioned by spiking COVID cases in the US and Europe this winter. Mordena, AstraZeneca and BioNtech breakthroughs in the medical world with effective rates of up to 95% rallied prices of risker assets include crude that has seen a marathon in momentum to $48 a barrel for international Ice Brent while West Texas Intermediate – WTI trades for $45 a barrel from levels in the 30s.
Additionally, the OPEC+ member states have resolved to extend supply cuts of 7.7million barrels per day for 3months beginning January to March 2021. this bullish streak will aid oil producing nations balance fiscal budgets while importers could bear the brunt in higher costs.
Kwacha bears in supply ebb and demand spike. Zambia is currently in the labyrinth of acute foreign exchange scarcity exacerbated by demand supply imbalances. Increasing backlogs in demand while supply remains feeble, have continued to add rout pressure on the local unit which trades north of 21 for a unit of dollar. The Kwacha slide remains the steepest slide of all African currencies trading 43% weaker year to date. Currency and government selloff pressures post Zambia’s default on a 2024 dollar bond coupon payment has added a more bearish outlook to the currency.
ERB could be under pressure to hike fuel prices. Given the current trajectory in underlying variables, the energy regulator could be looking to adjust pump prices higher given bear effect of crude and exchange. The Energy Regulation Board (ERB) did not however pass reprieve to the manufacturing sector earlier in the year when international oil prices slumped to record lows in the negatives citing Kwacha depreciation concerns even when the Kwacha price of oil ebbed 38%. Last fuel adjustment Zambia had was an upward 10% on average on 26 December 2019 and has since been flat at current levels despite movement in the underlying variables. One thing the Zambian market has seen in the petroleum market is paradox of thrift – downward rigidity of prices when crude prices plummet but faster hikes for the opposite.
Inflation and weaker PMI. A fuel price hike will not only be inflationary for Zambia but will amplify the energy cost driver effects of the private sector pulse and slump growth prospects. Energy cost has been a consistent theme in the business fabric metric, the Purchasing Managers Index for over a year as Zambia remains in contraction. Cost push inflation effects will widen even further from the 17.4% recorded in November.
The Kwacha Arbitrageur