The currency in Africa’s second largest copper producer Zambia is telling the market something about positive signs of a likely debt restructure. The ongoing International Monetary Fund and World Bank spring sessions have reverberated hope around a breakthrough for the Southern African nation that has been in the labyrinth of a debt reorganization but delayed by Chinese demands requiring multilateral development banks to have a fair share of haircuts. The Kwacha was reported to have erased its post August 2021 gains after change of regime that saw the ascension to power of Hakainde Hichilema. With delays in the creditors and debtors reaching consensus, markets because fatigued as asset sell off pressure brewed in the wake of uncertainty.
The Kwacha recorded the longest losing streak historically for a 122 days sinking to K21.55 for a unit of Dollar as players exited the market after coupon payments and bond maturities, as the economy expanded and imports grew adding pressure to demand while supply was constrained resulting in market backlogs. Between the 4th October 2022 and the 30th of March 2023 the Kwacha shaved 36% value from 15.78 to 21.42 in the second longest Dollar rally streak in Zambian history.
“The Kwacha will remain volatile for as long as the restructure pends. Restructure and the associated positive sentiment and expected inflows coupled with increased exports provides currency upside whereas debt service pressure and import led growth provides downside pressure,” PricewaterhouseCoopers Managing Partner Andrew Chibuye said.
The copper currency has however aggressively clawed back most losses on account of commencement of a mining and other tax season that saw Kwacha demand widen but coincided with positive sentiment gravitating towards what is expected to come in the next few weeks.
World Bank President David Malpass is optimistic about Zambia getting creditor assurances in the next few weeks as Janet Yellen the U.S. Treasury Secretary remains bullish about the Chinese finally dropping unrealistic demand a that have stalled progress in debt negotiation involving emerging market nations. Zambia is due for its second tranche of the extended credit facility to the tune of $188.8 million but on condition that creditor assurances are met. The IMF Article IV Mission team completed a review of the Southern Africa ahead of the disbursement if all conditions are met.
“Technically, a break of that 200 day simple moving average at 17.49 is required for a revision of the view for long term weakness. Fundamentally, sustaining recent and further gains will likely require crystallization of the positive debt restructuring sentiment into an actual deal. Should we indeed break lower than 17.490, it does open a move to a 16.0 handle with next Dollar support around 16.80 followed by 16.67, 16.18 and 15.40, which was last year’s low reached in Sep,” Executive Head, Trading, Opportunik Global Fund Dean Onyambu said in a note to clients.
Currency pressure triggered a rate hiking cycle by the Bank of Zambia which adjusted its benchmark interest rate 25 basis points to 9.25% for the first time in 1 year and further tightened its statutory reserve ratio by 250 basis points to 11.5% to curb a Kwacha slide. The run away currency exacerbated inflation manifesting in higher fuel prices after manufacturing activity.
From a red metal perspective, a poor start to the year in copper sales, in February lead to a weak trade surplus, which contributed to outlook for Dollar flows from mineral royalties. However, ZCCM-IH’s deal with Kansanshi could also start playing a role as an additional 3% from copper sales will be retained going forward but that doesn’t play as much of a role as it will result in an extra $50m being retained annually.
Wall Street on the other hand views Zambia as an undervalued asset and favorite frontier pick according to Bank of America, that recommends short position taking on the Kwacha which is deemed undervalued but supported by healthy red metal prices and political will to cure fiscal health.
The Kwacha has rallied north of 13.3% to trade at K18.25 for a Dollar as at 3pm in Lusaka, the capital.
The Kwacha Arbitrageur