Zambia this week:- Stat reserves and fuel could ebb higher, currency bears to persist

This is what the week beginning the 09 December could look like in the markets:

Stat Reserve Ratio could ebb higher: With a worsening currency slide, the more and more analysts forecast an emergency monetary policy committee meeting to tame a 22% (YTD) pounded copper currency trading at all time lows. The Kwacha slid to a trough of 15.77 for a unit on dollar in Friday’s 06 December trading after marginally reversing some of the losses to close at 15.67 for a green back. Falling reserves have crippled the Bank of Zambias (BOZ) buffer for absorbing external shocks as reserves hover just below one and half billion dollars the weakest import cover in over a decade. The expectation for this week is that whether through an emergency MPC or memo to commercial banks the SRR could be hiked by a minimum of 500bps to 10%. This should address the currency slide.

ERB could adjust prices higher this Thursday: An OPEC+ ratification of an additional 500,000 barrels a day above the 1.2 million bpd quota after March 2020 does not make the Energy Regulation Board (ERB) fuel price review this Thursday 12 December, as crude Bulls are expected this week as a consequence of the Vienna meeting outcome on 06 December. Ice Brent International benchmark rose 1.5% to $65/bbl. as US WTI crude futures rallied a 1.32% to $60/bbl. With a bearish Kwacha against the US dollar the ERBs mathematic models are already in breach of the 2.5% trigger level pointing to an adjustment. Zambias pump prices were up were last hiked in September between 4.88% and 12.93%.

Kwacha bears expected to persist: Currently the worst performer among the emerging market and frontier currencies with 22% weakness YTD, the Kwacha is expected to be under pressure given very little support from central bank intervention, value added tax refunds in the week. Should the monetary policy committee not act swiftly wider speculation could cause greater currency sell- off in the market. The Kwacha is expected to trade within 15.65-15.95 band with likelihood of detented pressure to 14.85-15.25 should sterilization action kick in.

Other risk outlooks in the period: *Zambia has two government security sales with two yards on total on offer. There exists latitude for the Kwacha demand curve to climb higher. *Inflation readings for December could widen higher to between 13-15% as currency lagged effects price in. *ERB could be approving a 75% tariff hike to be ratified by parliament. This is targeted to funding future energy imports. *Given actualizing risks to growth, Zambia’s long term issuer rating could be lowered by Standards and Poor’s/ Fitch/ Moody’s from that CCC+/CCC/Caa2 levels.

The Kwacha Arbitrageur