Will Kalyalya hike rates to curb a sliding Kwacha, at next MPC?

With barely a month to the last rate decision meeting (MPC) of the year, Zambia, Africa’s second largest copper hot spot grapples will rising debt, inflationary pressure and negative investor sentiment as evidenced by a blow out in credit spreads on its dollar bonds. Fitch rating agency downgraded the countries long term issuer rating (LTIR) on local currency (LCY) to ‘B-‘ from ‘B’ with (-ve outlook) a few months after Standards and Poor’s – S&P lowered the copper producers credit rating to ‘B-‘. Moody’s two months ago rated Zambia Caa1 (with stable outlook). All three rating agencies cite very similar issues across the bracket ranging from debt sustainability concerns with forecasts of rising debt to GDP to 70% to budget credibility concerns established from revision of fiscal deficit targets.

Crude oil (USD80.3/bbl. NYMEX 18.24pm 12 Oct.) on the international market is on the uptick and this has not spared the Southern African nation, which is a net importer of the commodity.  The crude price contagion is systemic to all importers in the region with SA hiking prices 5-times. The ERB recently revised its pump prices by over 16% to levels of K16.08 per liter for gasoline. The currency has been volatile shading off over 19% in value year to date as dwindling reserves (at USD1.815-billion representing 2.1-months import cover) leaving the copper producers central bank (BOZ) with little ammunition to stabilize the exchange rate. Inflation for August breached the 6-8% threshold at 8.1% after reversing to 7.9% in September (as base effects of 25% electric price hike adjustment priced in), however without the effects of currency depreciation taken into account as announced by the Central Statistics Office – CSO. October and November are expected to print higher CPI numbers outside the targeted bracket which could then elevate the kwacha yield curve higher.

Interim measures to shore up reserves, such as mineral royalty tax remittances in dollars directly to the central bank have been implemented. However this has starved the kwacha of support it receives monthly from dollar to kwacha conversions (mid-month) from the mines hence the currency slide experienced in the past few months.

The primary yield curve is elevated with 9-month to 1-year bills paying 20.5% and 22.5% respectively. Price discovery in the secondary market has shown yields in excess of 27% as investors reflect sovereign risk (Moody’s – Caa1, S&P and Fitch ‘B-‘ (-ve) outlook).

Could Kalyalya be planning a rate hike this November?

Benchmark interest rate trajectory for the kwacha to date. In the background is BOZ Governor Dr. Denny Kalyalya during an interview session in Lusaka.

With a volatile currency, rising inflationary pressure and rating downgrades, all odds points to the BOZ raising its benchmark rate at the November sitting. This will be the first time in 3 – years the central bank would be adjusting rates higher. Last the BOZ tightened monetary policy was by an aggressive 300- bps to 15.5% (in Nov. 2015) to stem a currency slide following high inflation and currency volatility during the El Niño drought and energy poverty era. However a rate hike will threaten the growth recovery targets set for 2019 as the already slowing down private sector pulse (currently at 48.2 Sept. PMI) will be penalized once again. From history, 300bps hike is not so far fetched.

The kwacha closed friday at K12.42/USD.

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