LIVINGSTONE (The Business Telegraph):- Business activity in Africa’s copper producer Zambia slid deeper in contraction for August as COVID effects on business fabric continue to bite. According to a Markit Economics release, Zambia’s headline reading slid deeper in contraction to 43.4 from 44.6 in July, signaling a more pronounced deterioration in business conditions in the private sector than had been the case at the start of 3Q20. (50 is the benchmark for expansion and contraction).
Deterioration even after stimulus actions. This will be the 18th straight month the copper producer is in the doldrums as it grapples with disease pandemic effects that have led to wage cuts, employment erosions and a general shrivel in consumer demand. Zambia has had some aggressive central bank stimulus over the period with immense injections of liquidity through persistent presence in Open Market Operations – OMO and a record year to date interest rate cut of 350 basis points to 8% the lowest since the Bank of Zambia started to track the policy rate. What worries the market is that despite all the central bank stimulus, consumer demand still remains feeble evidenced by a deteriorating private sector pulse.
Currency rout pressure on input costs. The recent currency depreciation will continue to weigh input prices which will elevate manufacturing costs to result in lean profitability at such as time as this. Some players in the supply business have been paid dues by the government of Zambia which has eased the funding burden and the lack of liquidity they suffered from, however this has increased pressure on the Kwacha as most players rush to claw back lost opportunity from 1H20 due to partial lockdowns. This is reverse cycle is breeding a currency rout that is exacerbating input inflation which is counterintuitive to a recovering private sector pulse.
Energy weighing manufacturing costs. Other drivers of weak business activity are elevated energy costs ranging from high fuel prices to power rationing effects which have persisted from 2019. Despite the Kwacha value of crude declining 35-38% earlier in the year, the energy regulator did not downward adjust fuel prices for operational reprieve in the manufacturing sector. A fuel adjustment given a recent currency slide remains a mirage.
Zambia’s peers. With the exception of South Africa in the doldrums following a struggle with COVID effects that have seen Africa’s most industrialized economy in extended lockdown, Zambia’s other peers posted significant recoveries in the month of August. SAs headline PMI infinitesimally rose (for the third month) to 45.3 from 44.9 (July). Though this was a slower deterioration in business conditions. across the South African private sector. Ghana’s seasonally adjusted PMI® rose to 51.2 from 49.7, while Nigeria’s headline rose sharply to 54.6 from 50.4 previous month. Kenya on the other hand headlined 53.0 from 54.2 (July).
The Kwacha Arbitrageur