As the foreign currency quagmire in Africa’s red metal hotspot persists, cost push inflationary effects have continued to the be the biggest drivers of inflationary pressure. According to the Zambia Statistics Agency release on March 25, inflation accelerated 60 points to 22.8%, a 61 month high last recorded in February 2016. Annual food inflation rate rose to 27.8% compared to 27.3% in the previous month while non-food inflation rose 17.0% from 16.2% in the previous month.
March inflation reading sinks treasury bill yields a further 60basis points under water between 280 – 880bps save the 1year point which is 295bps above current inflation at 25.75%. Primary bond yields remain afloat yielding 730-1170bps premiums above inflation. As currency risks persist the money market is beginning to bear the brunt of narrowing premiums another driver in addition to sovereign risk factors as a result of default rated paper. Risk weights continue to be an issuer risk concern resulting in higher provisions for banks that take duration risk in government securities.
INFLATION SPIRAL A BAROMETRIC COMPASS FOR A BEARISH INTEREST RATE TRAJECTORY
With more curve points on the short end underwater, there is pressure for interest rates to rise in correction because assets paying below consumer price index (CPI) are unattractive. There is a chance that the correction could be very aggressive and would result in trading losses for traders running risk positions in the 3m-9m tenors by any chance. The benchmark interest rate cycle has commenced with a 50bps hike on February 17 as the monetary policy committee adjusted the MPR to 8.5%. This upward shift could have been hire, to curb a currency slide, but for societal effects of covid on the business ecosystem. However the central bank will highly likely continue to slowly adjust rates upwards as the foreign exchange market grapples with dollar scarcity.
SHIFTING FISCAL HURDLES TO THE MONETARY SIDE IS BREEDING CURRENCY PRESSURE
With various interventions to inject liquidity into the real sector of the economy, arrears dismantling is causing pain in the foreign exchange market. Arrears dismantling to supplier and contractors (a good thing for the fiscal side) through cash of payment using bonds still sends them back to commercial bank backlog queues for dollars as they seek foreign currency for input importation. It remains vivid that for as long as the currency quagmire persists inflation and interest rate risks will remain elevated and so will private sector pulse as measured by the purchasing managers index (PMI) will remain constrained (<50). Zambia has been in contraction for 24months and last printed 47.1 for February as second pandemic wave effects weighed.
The Kwacha Arbitrageur