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Alba Iulia
Tuesday, August 4, 2020

Sentiment and Kwacha value

Headlines Sentiment and Kwacha value

A man counts out Zambian kwacha 50 denomination banknotes in this arranged photograph in Lusaka, Zambia, on Thursday, Oct. 8, 2015. Zambian Finance Minister Alexander Chikwanda is seeking to restore confidence in the economy to help reverse the world’s worst currency performance, record borrowing costs and sliding growth. Photographer: Waldo Swiegers/Bloomberg

This week, ZANACO released the 2019 Economic Review Report. Of much interest to me is a graph that depicts the performance of the Kwacha each time there was (adverse) sentiment about the country. In April/May, 2019, Bloomberg published a story, ‘Zambia pulling a Mozambique style hidden debt’. The exchange rate moved from K9.5/US$ to K10.3/US$. Shortly afterwards, after much market pushing (which saw the Eurobond performance break a new threshold), the Minister of Finance at the time, Margaret Mwanakatwe, released a statement of debt management. The market read this as positive news and the Kwacha appreciated to K9.8/US$.

Then came the China-buying-ZESCO story by Africa Confidential in September 2018. The Kwacha immediately traded at K12.5/US$, causing much panic in government. Government did not anticipate the story and failed to effectively dismiss it. The impact was felt for the entire month of September 2018. However, between October 2018 and April 2020, the country did not experience significant adverse news and the market was happy to experience some relative stability in the exchange rate, the Kwacha trading on an average K11.9.

In April-May this year, the International Monetary Fund, whose projections are closely followed by watchers and investors in Zambian securities and the Eurobond, cut the growth forecast to 2.2 percent for 2019. This was against government’s own projections of 3.8 percent of GDP. This, plus debt and weather concerns, caused some panic trading, the Kwacha trading at K14/US$. To reverse the free-fall of the Kwacha, Government made a very quick (verbal) reaction by announcing austerity measures. The Kwacha gained by trading at K12.4/US$. This was only negatively affected by the downgrading of Zambia’s sovereign rating (plus general excess demand of the Kwacha) when the Kwacha again depreciated to K13.1, the rate it traded at between July and October 2019.

What has suddenly happened? I would say the first part of the current depreciation was induced by a variety of factors: debt servicing, importation of energy, seasonal imports and speculative behavior. However, the most recent depreciation, which has seen the Kwacha break the psychological barrier of K15/US$ is induced by sentiment. Three things have happened within a week.

First, the market has been waiting for some very important news from Cabinet which, I understand, has not come. Early last week, I received an email from one of the investors based in the USA who probably got wrong communication about the much anticipated cabinet meeting on debt, ‘Chibamba, have you heard anything about yesterday’s cabinet meeting? When we were in Lusaka there was a lot of talk that they would present the cancellation/delay of pipeline projects.’ In other words, investors, uncertain about Zambia’s debt sustainability challenges, follow every piece of news about Zambia very keenly and when they don’t get it, they interpret it as ‘problematic situation.’

Second, the United States Ambassador to Zambia Daniel Foote made two critical statements in his recent press briefing that signalled a big problem. He said, ‘However, like the lack of public information made available on Zambia’s debt acquired over the past few years, the government has chosen not to share this vital data with its citizens…’ By implication, Mr. Foote was saying the debt position declared by government is not true. I presuppose this was interpreted adversely by investors. The last line of the same press statement read, ‘I hope the government of Zambia commits to improve its decaying relationship with the United States…’. Was it not just a few weeks ago the Minister of Finance Bwalya Ng’andu was assured by the US Treasury that the latter would support a deal with the IMF? What is this now?

Third, the Mukula tree story has had significant traction international over the past two days and I am not sure how government is dealing with it. It is on this cue I make my conclusion on the way forward: One area government is wanting is how to react to adverse sentiment. I did share with Mrs Margaret Mwanakatwe at the time she was Finance Minister that the Eurobond factor implies a change of strategy on how we pacify the jittery market. One solution would be to engage reputable international advisors who are perceived to be credible by investors to be the third-party communicators on behalf of government. I also suggested she needed to go to the market with authentic data as much as she could, particularly on debt. She heeded the advice by constantly releasing data from October 2018 till she was fired. The strategy somewhat worked.

Another approach now is for government to engage a very strategic, emotionally balanced communicator. I have in mind the Zambian Ambassador to the African Union, Emmanuel Mwamba. He has one advantage: he engages in debates very strategically and does good research when reacting to issues. I am not sure where to position him but maybe at Cabinet Office in equivalent position. He is the nearest in government I can think of capable of engaging diverse external stakeholders in a ‘seek-to-learn-and clarify’ manner.

When government is daily facing adverse sentiment, you need a very level-headed communicator for external stakeholders. The individual should have enough authority to help government put its house in order because you cannot sell what you do not have. Effective communications start with a reality check: Is there something that needs fixing so that adverse sentiment does not have breeding ground?

By Chibamba Kanyama

 

 

 

18 COMMENTS

    • One important factor CK is not emphasizing on is that the poor reserves of barely one month cover leaves us completely exposed to speculation and market information …. the currency needs to have leverage on the factors that bring about these swings …. market players need to know that the currency is well covered by reserves so regardless what market information comes up the shifts are not as significant and long lasting. Chibamba is emphasizing on managing scenarios as they come up … understandably he is leaning more towards perception/ information management (appealing to his journalistic side) than dealing with the real issue (his economist side)…Close out the deficits and shore up reserves. Zambia is currently a highly leveraged state

    • Mr Chibamba Kanyama, your advise to engage Emmanuel Mwamba to do damage control is amiss. Mwamba is a career cadre, meaning his interests are very firmly with his belly, NOT with the people of Zambia. Being biased as he is, he lacks the insight and wisdom to criticise constructively the hand that feeds him.

      PF have chronically and persistently damaged themselves, the only remaining remedy is regime change.

    • Chibamba Kanyama has left out the main causes of Kwacha depreciation: low levels of Forex reserve, debt servicing, and economy dependent on imports. Whether we like it or not, if these are not dealt with, mere political spins won’t help appreciate our currency. I get what he is saying, but the underpinning factors are what I just stated. PF is incapable of doing this bane. Like it or not.

  1. Great Peace of Advice Mr. Chibamba Kanyama. The market needs well researched and collaborated economic information. The technocrats in government and other public institutions should be ready to provide such information every now and then so that speculations and speculators can be minimized. But where are the technocrats?

  2. Thought provoking for pf who dont listen but to themselves. Mr Chikasa can make or break this goveenment. PF should not dare him. Balenyela ama sushi kuli HH not Chikasa.

  3. When your immunity is compromised, even eating unripe mangoes can cause you to be sick. You can catch a cold just by spending a night at a funeral. Similarly, if your economic fundamentals are weak, any upheaval, no matter the source and size, can cause ripples. Last time Kambwili said something derogatory about Edgar the Kwacha lost value by a few percentage points. This is indicative of a weak economy. Once the economic fundamentals are strong the economy becomes immune to such external shocks, no matter the size.

  4. KCM brought negative publicity for the country and its FDI. Two, Bill No.10 brought negative publicity for the country and FDI. Three, load-shedding shook mining industry and manufacturing. Four, attacks on basic liberties of marginalized populations like gays brought negative publicity for the country. Five, food security was threatened by policy contradictions. These and numerous similar factors could affect business climate because perceptions are difficult to counteract. It is good for business when Government officials do not provoke any individuals by sounding chauvinistic and arrogant.

  5. I have said many times that Emanuel Mwamba is being misused as Ambassodor, he is very good at communicating and engaging not only with people who oppose the PF government but he would be good as an Information Minister or President Lungu’s press aid.
    Dora is hopeless and to sentimental, Dora needs to be moved to Gender issues.

  6. Any marriage that has problems anytime some gossips is fundamentally a rotten marriage….

    Any time a currency slides at mere news is indicative of a rotten economy…….

  7. Our Kateka is not serious about helping our Bank of Zambia and MOF to stabilize our Kwacha and economy! Eat time he speaks, he sends more uncertainty into the economy and that is what messes up our currency! Him keeping quiet for once is best for our economy! Neglect the economy at your own political peril!! Can we exercise self-restraint for once! Can his handlers and advisors do the right thing for the country for once!

  8. He has just stated that road infrastructure needs “urgent attention. He knows where the money will come from, but the impact on economic sentiments can be quite negative.

  9. “I am not sure where to position him but maybe at Cabinet Office in equivalent position. He is the nearest in government I can think of capable of engaging diverse external stakeholders in a ‘seek-to-learn-and clarify’ manner.”
    Chibamba, I thought you said the problem is lack of transparency by our boma, and you even quoted Ambassador Foote?
    But better than Habanjoka party cadre anyway.

  10. BO CHIBAMBA AND THE MANY ZAMBIANS IN ZAMBIA, CRYING AND USING ECONOMIC LANGUAGE WONT BRING THE KWACHA DOWN! ONLY SOLUTION IS TO UP AND INCREASE THE RESERVES THROUGH PRODUCTION OF GOODS AND SERVICES, AND EXPORTING THEM TO OTHER COUNTRIES! MARKETS FOR SOYA AND SOYA PRODUCTS ARE YAWNING, MARKETS FOR GOATS AND PIG PRODUCTS ARE YAWNING, MARKETS FOR GOLD AND MANGANESE ARE YAWNING IN CHINA, USA, MIDDLE-EAST! THAT IS WHAT WE SHOULD BE TALKING ABOUT! WHAT WE SHOULD BE TALKING ABOUT IS BRINGING DOWN THE COST OF PRODUCTION AND PRODUCING QUALITY PRODUCTS FOR EXPORT! AND NOT THOSE SUB-STANDARD GROCERY PRODUCTS FROM TRADE KINGS! SO ZAMBIANS LETS GO INTO PRODUCTION AND AGO-PROCESSING SO THAT WE CAN EXPORT AND ADD ON TO THE STRENGTHENING OF OUR DEAR KWACHA INSTEAD OF THEORIZING RATE OF THE KWACHA!

  11. The biggest problem is debt and aid dependant economy where by an project which is being done in country is either debt or aid. Sentiments are of passive effect if the fundamentals are strong on the group, but since we have so much dirt under the carpet, it takes one truth (sentiment) from the dirt to shake the entire economy.

  12. The biggest problem is debt and aid dependant economy where by an project which is being done in country is either debt or aid. Sentiments are of passive effect if the fundamentals are strong on the ground, but since we have so much dirt under the carpet, it takes one truth (sentiment) from the dirt to shake the entire economy

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