Before banking became complex with savvy product offerings and a widening competitive landscape, 363 was the norm. Bankers funded their balance sheets at 3%, and lent out funds at 6% and by 3pm bank managers were on the golf course. This is a figure of speech depicting ebbing cost of funds. Zambia is experiencing a very interesting phenomenon in its yield curve whose shape has normalized since August coinciding with the polls. Previously the Kwacha demand curve was kinked across depicting sentiment, risk aversion and investor behavior shaped by sovereign risk perception of the copper producer. The treasury bill sale of October 07 saw the 1 year T-bill settle at 13.9985% levels not seen in years and what remains intriguing is that this 1,150 basis points lower than where the curve was in August. The post-election bond bump rally effect seems to have been contagious to extend to the short end of the government security curve. Appetite for the 1 year paper was in excess of K2 billion of which the Bank of Zambia was able to absorb K700 million. This tenor was also the most sought for in this debt sale.
MARGIN SQUEEZE FOR FINANCIAL INSTITUTIONS BUT CREDIT STIMULUS FOR ECONOMY
Much as a compressed curve signals lower lending costs for fresh credit and is evidently credit growth stimulus, commercial banks will be faced with margin squeeze as their interest income lines come under immense pressure. Well, the markets could be signaling the need for more innovation in product offerings to compensate for lost margin. Inflation has however kept the Kwacha demand curve submerged (inflation > yields) as it is still elevated in the 20’s at 21.2%(September) whose intensity is somewhat easing as base effects kick in while the recent currency appreciation gave some cost reprieve to producers who started to lower selling prices. The exchange rate, has started to push upwards which could be counter intuitive to consumer price index (CPI).
Oher factors that could weigh in on inflation include, record high crude oil prices if the Energy Regulation Board (ERB) contemplates reflecting real petroleum prices (in the next price review) that have been subsidized since December 26, 2019. An inflationary environment could offset real time value of money and that’s why we should be concerned about it.
US FED TAPERING COULD SHORT-LIVE ASSET RALLY
With the US Federal Reserve contemplating commencement of a tapering program to curb inflationary pressure, the hype around demand for emerging market assets, Zambia’s government securities inclusive, could be short-lived as early as end of 4Q21 into 1Q22. The recent confidence surge as a result of subsiding political risks following a power transition to Hakainde Hichilema fueled a very strong rally in the bond markets both for local and foreign currency denominated assets. For the first time in 2 years, offshore players have expressed interest in tenors exceeding 5 years. Risk skew towards shorter dated higher yielding assets was a common theme for a long time in the Zambian money markets as sovereign risks weighed.
With a flatter yield curve, its is forecast that average rates by the end of 4Q21 should be below 20% levels.
The Kwacha Arbitrageur
