Lagged effects of the Kwacha depreciation effect on food and non-food prices jumped 140 points to 17.4% for the month of November sending the 3m and 6m treasury bill yields underwater. This is the highest Zambia has seen in close to 4 years. Inflation has been on a climb since August 15.5% with the rise attributed to a steadily depreciating currency impacting food prices and other non – food prices.
Post default, currency sell – off is expected in the copper producer, a risk that the central bank is well aware of. Last week in his debut rate decision announcement, governor Christopher Mvunga acknowledged that currency depreciation was a source of concern. The Bank of Zambia inflation target of 6-8% remains a huge milestone in the medium term as inflation is expected outside the band.
The Kwacha remains the steepest slide of all African currencies at 43% after having opened at 14.7 for a unit of dollar and now trades north of 21. Zambia is in the labyrinth of fiscal fragilities and economic woes as it navigates a debt restructure process. The red metal producer skipped a coupon payment on its dollar bond maturing 2024 on Friday November 13 which has seen sentiment plummet significantly.
Premiums on its treasury bills have been narrowing significantly given increased liquidity injections by the central bank as they target absorbing COVID related shocks. The 140bps jump in headline inflation not only narrows the compensation margin for government security risk but sends the 6m and 3m deeper underwater, making them more unattractive compounding the effects of selective default rating of the paper.
The Kwacha Arbitrageur
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