The central bank in Africa’s second largest copper producer Zambia has raised its benchmark interest rates by 50 basis points to 10.0% in the quest to tame inflationary pressures in sight. This rate adjustment is the third action this year by the rate decision committee bringing the total to 100 bps. The decision was announced by Bank of Zambia Governor Dr. Denny Kalyalya in Lusaka the capital on 23 August. Todays announcement makes lending 50bps costly for Zambian borrowers.
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The monetary policy committee communique cites an array of headwinds to include both endo and exogenous factors such as environmental threats in El Niño weather poised to affect agribusiness and energy generation this year. Inflation for July headlined 10.3% as the food portion of the consumer price index widens.
Earlier in July Zambia’s finance ministry released its Medium Term Expenditure Framework that downgraded the red metal producers growth forecast to 2.7% (from 4.7% FY22) as copper production ebbs lower by 10% to a record 14 year low.
DEBT RESTRUCTURE COMPLEXITIES DO WEIGH
Amidst a debt restructure process in progress markets will seek clues as to when the private portion of the obligation reorganization will complete. Only when the copper producer signs Memoranda of Understanding with bilateral creditors will the private creditors tangibly negotiate the restructure process. Zambia was by Moody’s rating agency, upgraded on its local currency long term issuer risk rating to Caa3 from Ca citing the landmark bilateral debt deal treatment attainment under the G20 common framework.
Moodys nonetheless highlighted weak governance, cash flow position and environmental exposures as downside risks to Zambia’s fiscal position. Until the private portion of debt is restructured will the foreign currency issuer rating improve from current default status.
KWACHA BEARS PERSIST
Kwacha bears have persisted with supply concerns which the central bank sought to curb through sale of currency north of $300 million. The Kwacha crossed the K19.500 psychological barrier last week raising concern on the persistent bearish trajectory which signals higher input costs affecting factory pulse.
FACTORY PULSE REBOUND
August factory pulse as measured by Purchasing Managers Index released by Markit Economics was 51.0 a notch below previous months 51.2 but the third expansionary reading as the manufacturing sector signals economic rebound. (Readings above 50 signal expansion while those below 50 signal contraction in manufacturing activity). Headwinds to include currency weakness and energy bottlenecks are upside risks that could weigh factory pulse in the next coming months. Employment for August was nonethless at a 1 year high as reported by the PMI report.
GRIM GLOBAL OUTLOOK ANOTHER RISK DRIVER
The global outlook remains bullish but business leaders are not as optimistic given the geopolitical developments that could affect grain markets and trade given widening fragmentation. Rate hikes have continued by most central banks that are still not within their inflation targets. The US Fed and other key peers are still grappling with containing inflation while the world could just be faced with another new threat to recession pressure as Chinas property giant Evergrande files for US bankruptcy.
The Kwacha Arbitrageur
