Giving a market outlook for Zambia, the bank says over the past month the African currencies in its coverage have performed fairly well.
It says its index of African currencies continued to appreciate, improving the forex returns.
The bank says global sentiment was also buoyant over the past month, helping to boost emerging market’s currencies noting that the Zambian Kwacha appreciated aggressively.
“At the time of publishing USD/ZMW looked poised to make a run for 9.00 from nearly 11.35 a month ago. Much of this seems to be local banks unwinding long USD positions rather than any material forex inflows. Of course, in a market with subdued forex demand due to tight liquidity conditions, and an illiquid interbank forex market, any forex flows tend to be exaggerated. This may well have been the case with the ZMW,” it said.
It said, “Given the frenetic pace at which African forex has run in the past 2 months or so, we may very well see some reversal in the coming weeks. Certainly the ZMW looks like a good candidate for such reversal.”
The report further notes that there is potentially a chance that USD/ZMW moves lower still before gradually grinding higher.
“Support for ZMW has largely been accomplished through the Bank of Zambia’s (BOZ) tight monetary policy stance, sporadic copper forex inflows and a slowdown in corporate activity, import demand remains constrained in Zambia in line with a general slowdown in economic activity.”
The Standard Bank said the Bank of Zambia recently revised its GDP forecast for 2016 to 3.5% from 5.0% projected late last year.
“Additionally, credit growth has moderated to 29.0% y/y in Feb from 32.5% y/y in Jan.
“Imports declined by 14.1% y/y in USD terms to USD525.3m by Feb. While the imports of capital and intermediate goods remain relatively robust, there has been a more prominent decline in the imports of consumer goods and raw materials,” it noted.
“In any event with Gross Forex reserves at USD2.92bn in Jan 16 which is 4.3 months of import cover) and subdued import demand (at least for now), we expect the currency to remain supported for a while still. Zambia’s Treasury indicated that negotiations on a formal IMF programme will be concluded in Apr 15. While this is encouraging, we suspect that the dissolution of parliament in May ahead of the 11 Aug elections and the possibility of a run-off election could lead to implementation delays,” it said.
The bank said arguably, an improvement in the external sector through a rebound in commodity prices or the authorities’ commitment to a funded IMF programme would see a meaningful change in sentiment toward Zambia and support for ZMW.
“A programme with the IMF would not only boost confidence in Zambia but would probably impose fiscal consolidation on Zambia, restraining imports further and thereby also providing some support to the Kwacha.”
On the mining front, the bank noted that Glencore plans to invest USD1.1bn in its Mopani copper mine during 2016-18.
“This investment will allow the company to sink three shafts at the mine with new technology that will help reduce production costs and extend the mine’s life by more than 25 years.
Meanwhile, following conversations with Zambia’s Chamber of mines, we believe that copper production could remain stagnant this year at around 710k MT recorded in 2015.