“K100 in Zambia will buy you 6.82 litres of petrol from 7.5 liters 2-3 months ago. This has caused motorists to incur more in transport costs. As a consequence of the energy regulator (ERB) hiking pump prices by a 16.8% – 21.8% quantum Oct. inflation jumped to 8.3% as the local transport association hiked bus fares by 22% to reflect international crude prices. Private sector pulse on the manufacturing end has slowed for the last 4 months as a result of higher inflationary input cost. The ERB hike was triggered by international oil prices nearing USD80/bbl. in Oct.18.”
Global weakness suppressing aggregate demand
Global demand is waning, as China the world’s second largest economy is slowing down. This has and is being evidenced by a myriad of indicators ranging from retail sales output to purchasing managers index (PMI). Crude markets, currently grapple with US inventory buildup, which has been the largest suppressor of pricing on the New York Mercantile Exchange (NYMEX). The oil producing and exporting country club, the OPEC, on the other hand met in Vienna on 30 Nov and alongside Russia (one of the world’s top producers of oil) agreed to short supply by 1.2 billion barrels daily effective Jan 2019. This was intended to provide support to crude prices. OPEC club have further provided commitment to shorting supply if the initial settled for quantity is inadequate to rally oil higher. OPEC will have a follow up meeting in Baku the capital of Azerbaijan. The bearish trajectory is as a result of global risk factors capping any gains that are supposed to result from the adjustment to supply fundamentals.
Risk cocktails the global markets world face currently
The world faces a cocktail of risk factors heavy of which are US driven. It is amazing at how a simple ‘tweet’ from US Donald Trump can swing the market in any direction and lately these have been at the expense of emerging markets (EM’s).
Other risk factors point to geopolitical tensions, trade war tensions between US and China and the uncertainty around Brexit as the United Kingdom has less than 100 days to exit the Euro.
This has raised market access concerns and has reflected in sterling volatility trading at 20 month lows. British Prime Minister Theresa May aims to convince a stubborn and controversial house of commons with a vote slated for the week of the 14 Jan.19.
How then does a bear market benefit Zambia?
Africa’s second largest copper producer, Zambia, is a net crude importer whose import bill significantly weighs from oil and petroleum dollar denominated purchases. The Energy Regulation Board (ERB) factors in the spot dollar price of Brent which determines the cost which is a major determinant and starting point in fuel pricing.
Just last month the energy regulation board (ERB) hiked pump prices of fuel by between 16.8% – 21.3% for gasoline to kerosene respectively. This followed the oil bulls that so crude almost flirted with highs of $79/bbl. (for Brent). This hike for Zambia was long overdue because from the last time a review was conducted in February, crude edged 26% higher and the kwacha shave close to 9% in value. This adjustment fueled inflation higher to breach the 6-8% BOZ targeted band at 8.3% as transportation and manufacturing costs ballooned wider. (Nov.26 Business Telegraph)
Read also: A #tweet# to the energy regulator (ERB) as crude prices ebb lower
However, the economics justifying the correction will be that, Brent prices have plummeted over 33% to current levels of USD53/bbl. However, the justification of the ERB’s delayed downward ebb in fuel price is that, stock ordered at USD79/bbl. is still in the country and would have to deplete to reorder level for a revaluation of replenishment inventory to happen.
We forecast that by end of Jan. 19 current inventory would have depleted to reorder and that oil bears will still persist. Ceteris paribus, this should lower the manufacturing cost curve for Zambia through lower pump prices which will be as a result of fresh inventory at lower Brent costs. We project that crude will reverberate around USD52-USD55/bbl. and if this holds ERB should be reversing the Oct. 18 fuel hike.
The 90-day (US -Sino) trade truce period of uncertainty serves an opportunistic window for EM’s (Zambia inclusive) as China and the US step up negotiations to avert additional trade tariffs.
Likelihood of black swan events cannot be overlooked as the market has already seen two so far namely the arrest of the Huawei CFO cited for espionage in the US and the Chinese developers that hacked US tech firm systems to access US client files. These events created tension in US -China diplomatic ties which jeopardize progress the two economic powers make on trade. Analysts have warned investors on cautious optimism as positive progress made between the two powers can be reversed with even a simple tweet from the white house.
Where will growth momentum stimulus emanate from?
Zambia has its own upside risks to growth key of which point to new mining tax regime impasse between the mines and the state. This could potentially wane mining productivity and constrict exploration spend as cited by the mines. The Chamber of Mines have estimated Zambia will lose out on USD500 million over 4 years in exploration investment.
On the other hand, lack of consensus could create funding cost pressure for execution of the 2019 fiscal spend which could filter through the cash markets in higher government debt yields.
However, the positive effects of oil bears, include a boost in manufacturing as its operational cost curve eases due to milder fuel costs. Cost push inflationary pressure will subside allowing industry output to rally which could be stronger drivers of GDP growth in 2019. Transport costs will also gravitate lower easing the burden on citizen’s disposable income. This coupled with a resilient banking and a booming telecoms sector industry will grow the economy stronger and move it closer to its 2019 growth target of 5.1%.
The article was compiled the Business Telegraph economics and commodities team.