STANBIC PREDICTS INTEREST RATE DROP
The move was primarily driven by agricultural companies ahead of the farming season starting in October and a boost for construction companies who received arrears payments from the government. However, sluggish business activities at the start of 2018 have left the Kwacha trading just below its 100-day moving average at USD/9.80 and left it poised for further gains. The US dollar remains weak globally, supporting commodity prices including copper, which remains above $7,000 per tonne. A weaker greenback also looks set to remain supportive of the local unit in H1 2018, said Stanbic. The year-on-year inflation rate is at 6.10 percent and is expected to remain between 6.50 percent to 7 percent over the next three to four months, its added.
Meanwhile, the Bank of Zambia is still in an easing cycle after cutting the Business Process Reengineering (BPR) and Statutory Reserve Requirement (SRR) by 525 and 1000 basis points (bps) respectively in 2017. The November cut came as a surprise to the market and resulted from the persistently elevated average lending rate across banks. Despite the cuts in SRR and BPR, the average bank lending rates only dropped from 29.41 percent in January 2017 to 25.57 percent in November. This is because government continues to crowd out private sector credit extension through excessive borrowing.
It is for this reason, that if the USD/ZMW rate stands firm and inflation continues to be subdued, the Bank of Zambia will likely cut the BPR again in H1 2018 by at least 100bps, said Stanbic.
Zambia continues to borrow heavily from the domestic market and has increased securities issuance in 2018. For this reason the IMF programme set for 2017 was put on hold until at least Q2 this year. The Economic Intelligence Unit projects that a deal will only be done in 2019. However, GRZ has shown restraint and the budget deficit in 2017 was set to close at -7.9 percent and improve mildly in 2018 to -7 percent.
The lack of an IMF deal continues to play on the market. However, a timeline of Q2 2018 gives the government some wriggle room because the offshore market may remain stable in H1 2018, easing upward pressure on interest rates in the long run. The expected easing by BoZ and the increased issuance amounts means that interest rates in the long run will likely remain elevated but continue to be attractive on a real yield basis.