Africa’s second largest copper producer Zambia, will the week beginning November 21 commenced deliberations on the ultimate interest rate decision for the year 2021. Amidst elevated inflation yet on a steady receding pace, the Southern African importing nation still faces threats to consumer price index (CPI) weighed by exogenous factors such as supply chain disruption related pressures in the global chains as the 4th COVID wave exacerbates. Global food prices remain high as measured by the Food Agriculture Organization (FAO) index giving a cue to soft commodities that continue to weigh on prices of feed in the domestic market. The meeting is also Dr. Denny Kalyalyas debut this year after his reinstatement as central bank head following the resignation of Christopher Mvunga in September.
The last 3 months have seen significant changes in the Zambian macroeconomic and political landscape ranging from a change in government to significant strides in the country’s foreign policy usage for economic diplomacy purposes to help claw back lost confidence in the copper producers economy. The red metal producers sentiment is on a recovery streak evidenced by narrowing in credit default spreads (CDS) on its dollar bonds and a strong rally on its local currency bonds.
A FLATTER YIELD CURVE WILL LOWER CREDIT COSTS
From the last monetary policy committee (MPC) in August the Kwacha demand curve has ebbed between 440 – 1,340 basis points on the short end (treasury bills) while the long end climbed down 825 basis points on average as demand for government securities rose on the back of a post election bump supported by elevated global inflation and ultra thin treasury yields in the west. The central bank still grapples with the task of lowering inflation within the 6-8% target band though exogenous pressures from rising food prices as highlighted earlier and other supply factors induced by rising COVID cases in the east remain counterintuitive to the banks efforts to lower CPI. Zambia’s October inflation headlined 21.2% keeping a portion of the yield curve underwater (below CPI).
RATE DECISION EXPECTATIONS
Kalyalya will likely keep rates unchanged at 8.5% (50bps higher than the lowest the MPR has ever seen since it’s inception in 2012) as expansionary monetary policy extends to support growth of the economy which does exhibit latitude for growth aligning to post pandemic recovery. Currency risks remain another key concern as the copper currency has started to post losses after a strong pre and post election rally fueled by an influx of foreign currency liquidity from global investors seeking yield in Kwacha fixed income assets. The last three months saw the Kwacha gain over 16.8% to 15.95 levels for a unit of dollar gravitating closer to its trade weighted value after-which growth in economic activity for the net importer has started to exert pressure depreciating pressure on the copper currency which currently trades for 17.5 for a unit of dollar. Monetary policy is now shifting back to inflation based from pandemic induced in the previous months to a year following unprecedented times.
EASING POLITICAL RISKS A POSITIVE CUE ON THE MACROS
Zambia is at a critical stage of its recovery cycle with its fiscal authorities taking strides to restore fiscal fitness through negotiating for IMF bailout which serves as precursor for success debt restructure. This has boosted confidence and sentiment that has narrowed credit spreads on its dollar bond portfolio and flattened its yield curve significantly but sent yields on government securities underwater. We remain of the view that the monetary policy committee has little scope to lower the benchmark interest rates which we assign an 85% weighting for unchanged outcome while a 15% weight is attached to a 50 basis point cut should the central bank seek to effect further aggressive growth.
Kalyalya is expected to announce the outcome of the last rate decision meeting of 2021 on Wednesday November 24.
The Kwacha Arbitrageur