Africa’s red metal hotspot, Zambia could see its first rate hike in the debut rate decision meeting of 2022 whose deliberation will commence on 14-15th February with the announcement to be made on Wednesday 16th February 2022. Since the last meeting that saw a 50 basis points (bps) climb to 9.0% marking the genesis of a rate hike cycle in the wake of widened inflation, the Southern Africa nation has seen volatility in currency characterized by a rally triggered by further confidence boost when the Ministry of Finance reached consensus with the Special Mission team of the International Monetary Fund for a $1.4billion Extended Credit Facility (ECF) closing December 2021 at 16.68/USD while the year 2022 has seen a slide in the copper currency as it flirts with lows of 18.5/USD weighed by an array of factors key of which as market jitteriness as players seeks clarity around debt restructure whose goal posts continue to shift.
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Inflation has subsided to 15.1% (Jan) from highs of 22.3% (in 2021) due to strong base effects that nonetheless are phasing, while upside risks to Consumer Price Index (CPI) persist from both exogenous and endogenous factors. Foreign investor holdings in government securities has scaled to just over a third adding pressure on the Kwacha from repatriation of coupon payments that are falling due almost every month while demand for petroleum as the economy seeks to claw back growth eroded by COVID19 is another key driver of dollar appetite. Exogenous factors include excessive inflation in the west that is forcing global central banks to hike rates aggressively to curb the worlds top risk in 2022, excess inflation. The United States (US) just recorded 7.5% record inflation while Japans 8.85% Producer Price Inflation (PPI), England’s 5.4% and Germans 4.9% for January will trigger rate hiking decisions by respective central banks.
US Fed Chair Jerome Powell. With record high inflation the Fed is looking to taper money market to curb the consumer price index.
WHAT A FED RATE HIKE MEANS FOR EMERGING AND FRONTIER MARKETS
A rate hike by the US Fed as early as March will entail a stronger dollar which by default weaken Emerging and Frontier Market (EFM) currencies, the Kwacha inclusive. The current dollar index against a basket of 6 major currencies (DXY) currently at 95.74 and is set to climb higher. Additionally higher yields will scale treasury yields higher attracting excess liquidity back to bonds, away from EMF markets that for the last 6 months – 1 year enjoyed global gold rush for higher yields. These flows provided aggressive support to currencies such as the Kwacha as western players housed excess liquidity (from global stimulus programs) in government securities. The rate hike is highly likely to reverse this pattern which will deprive the copper currency of the support its enjoyed in the post-election bond bump period. The 1Q22 is likely to see flight to safety as more investors seek safer haven refuge in the dollar.
Joe Biden (US) and Xi Jinping (China) confer of trade related matters.
US-CHINA GEOPOLITICAL TENSIONS COULD WEIGH
The world currently struggles with geopolitical risks the largest being that between China and the US which dates as far back as the Trump administration. This tension is mirrored in the Ukraine – Russia stand off with the two at brink of war. US and China are reflected in Zambia’s debt profile and is complicated by the need for Chinese transparency in restructure for the west to be comfortable. Fundamentals have evolved since the last meeting with bondholders with rate hikes on the horizon to curb inflation which could affect the refinance discussion of the copper producers bonds outstanding. At what rates will bondholders agree to restructure given potential rate hikes? Let alone can restructure close in 3 months? These are some of the shifts in fundamentals that will impact restructure should the discussions delay. It is vivid that Chinas ability to take losses on bonds is hampered by the property debt market restructurings such as that of Evergrande and the local governments. Haircuts of 66% being called for my Civil Society Organizations (CSOs buy) could be a mirage in reality.
A Rubis fuel station in Lusaka on Ben Bella road. Zambia faces higher fuel prices given a weakening currency and $90 a barrel oil.
COST PUSH INFLATION PRESSURE FORECAST FROM CURRENCY BEARS
Upside risks to inflation will persist from higher fuel prices in the 1Q22 predicted from the $90 a barrel Brent crude and a weaker Kwacha which will push manufacturing costs higher and this could weigh private sector pulse as measured by the Markit Economics Purchasing Managers Index (PMI) which has already slid into contraction for February 2022 at 49.9 (the first contraction after a 4 month straight of expansion) weighed by Omicron effects. Other drivers of currency bears will be nervousness as players seeks clarity on Zambia’s fiscal fragilities. Zambia’s MinFin targets to close an IMF deal by June leaving it with a Russian roulette window of 3 months to address debt restructure as the celebrated debut $750million falls due in September 2022. An IMF package is a precursor for successful debt restructure however the authorities in the 2022 budget did budget for the full debt which market analysts, inferring from the muted left hand side supply side of the market, suggest the central bank could be stocking up on foreign currency for the restructure negotiation. To that effect, that could explain the very low intervention in the market to stabilize depreciation recently. Zambia as part of a subsidy removal program could adjust electricity prices in 1Q22 which will add more pressure to selling prices.
HIGHER ODDS OF A HIGHER RATE HIKE IN KALYALYA’S SOPHOMORE MPC
Dr. Denny Kalyalya is likely to raise rates for the second time in a row but this time with greater intensity between 100 – 150 bps as the committee seeks to reign in on upside risks to inflation posed by the global fundamentals. We attach an 80% chance of an upward adjustment in this period of ‘uncertain’ certainty as Zambia is at a very critical stage of its fiscal lifecycle coming from a political shift that accelerated steps to correct the frail fiscals breeding certainty around the IMF package, however when the approval will crystalize is what leaves uncertainty causing players to fret and this has caused currency volatility. Zambia resides in a global village and is not insulated from exogenous factors clouded by stronger dollar effects and flight to safety expected as the US Fed commences its rate hike cycle. However a lower chance of 20% is apportioned to rates remaining tad at 9.0% but with some form of money supply tighter adjustment to manage inflation.
The Kwacha Arbitrageur
