Energy price risks to ebb Jan inflation higher as interest rate risks remain elevated

As January month end draws nigh, Zambia Statistics Agency (ZSA) is expected to announce consumer price index for the first month of the year. Given rising energy price risks braced by a fuel pump price and electricity tariff hike announced on 26 December 2019, inflation number for January are forecast to ebb 80 basis points higher to 12.5% in Tuesday 28 January announcement.

A BRACE OF ENERGY PRICE RISKS. Zambia grapples with energy poverty given receding dam levels as a consequence of climate change effects. To apportion the cost of importation of power and steady supply, the energy regulation board approved an application by the power utility to hike tariffs to cushion the negative jaws that ZESCO Ltd is experiencing. Rising crude prices and currency bears have manifested in higher fuel prices of which Zambia is a price taker that has passed on the costs to the manufacturing sector who have in turn passed it onto consumers through higher selling prices.

CURRENCY RISKS. Currency depreciation effects in the month of January given rising dollar appetite to fund not only the petroleum sector but the agriculture input sector is another key driver of input and cost push inflationary pressure. Zambia’s private sector pulse is projected to be in the doldrums given an elevated cost environment exacerbated by elevated energy prices.

INTEREST RATE RISKS. Interest rate risks remain elevated as evidenced by higher repricing risks in the Kwacha demand curve. In the three undersubscribed government debt offerings one year securities repriced 50bps to 28%, 2yr bonds rose 145bps to 30.95% as 15yr bonds are now 100bps higher at 30%. A wider inflation trajectory will narrow the premiums paid to investors for taking risk in sovereign paper.

The Kwacha Arbitrageur