In a note to investors, Stanbic Bank says the US dollar and the Zambian Kwacha which was trading just shy of the 11.0 level in the fourth week of Jun from 10.4 a month earlier will be under more pressure as the country heads to the elections.
It said while the local press has hinted that the authorities may reintroduce regulatory controls to help support the currency, the bank believes that in the absence of improving fundamentals, regulatory changes may in fact prove negative for the Kwacha.
“We expect upside pressure on USD/ZMW to persist on a multi-month basis. In the absence of strong left hand side flows, strong import demand and relatively loose domestic liquidity conditions, we have seen the kwacha depreciate against the USD since Apr,” it said.
“Even the usual liquidation of FX by corporates to fund tax payments in the week ended 14 Jun did not provide much support for ZMW. Support for ZMW in the period Dec 15 to Apr 16 was largely accomplished through the Bank of Zambia’s (BOZ) tight monetary policy stance, sporadic copper-related FX inflows and a slowdown in corporate activity.”
On the trade front, Stanbic Bank says total imports were also subdued in the period Jan –Apr, providing some support for the ZMW.
“According to Zamstats, imports stood at just USD2.31bn in Jan-Apr 2016 while exports were USD2.08bn, allowing for a narrower trade deficit. In any event with Gross foreign reserves at just USD2.6bn at the end of Mar 16 (4.0 m of import cover) and import demand likely to increase going forward on the back of improved credit conditions, we do not believe that the authorities are able to aggressively support the currency ahead of political elections in August.”
The Bank said a formal IMF programme is unlikely to be clinched just before the elections, and the possibility of a run-off means that there could be even further delays.
“However, the IMF has indicated that it is in discussions with the Zambian authorities “to lay the groundwork for rapid action toward a Fund program following the Aug elections.” Arguably, an improvement in the external sector through a rebound in commodity prices or the authorities’ commitment to a funded IMF programme could also see a meaningful change in sentiment toward Zambia, thus supporting the Kwacha.”
It said an IMF programme would likely advocate import compression and engineer fiscal consolidation, thus supporting the Kwacha.