BOZ expected to keep rates unchanged this week - continued
However even with monetary policy easing, the average lending rates by commercial banks has decreased infinitesimally to levels that still render lending rates still high at 23.7%. Liquidity and credit spreads above the policy rate remain fairly high. The banking industry is still faced with an elevated level of non-performing loans at 12.7% above the 10% prudential limit. This is attributed to government domestic arrears that have risen to K13.7billion (a K1billion increase as at 31 June) due to infrastructure spend. As such the credit risk profile of counterparty’s exposed to the state has deteriorated.
The treasury bill market has been undersubscribed for a while due to players maxing their exposures to sovereign risk leaving little appetite for investment in government securities. The last 5 treasury bill auctions were deeply undersubscribed despite excess liquidity in the markets. Last Thursday the treasury bill auction was only fully subscribed due roll overs as most players had maturities falling due. Treasury bill yields have been on the uptick due to a few players that have been bidding high. The 91-day T-bill is paying 130bps higher at 19% (17.69%), while the 273 day is paying 553bps higher at 18.5% (from 12.91%) and 180 days 200bps higher at 15% (from 13.01%) compared to last MPC levels.
Inflation despite remaining within the target band of 6-8% has oscillated within the 7.4-7.8% latitude fueled by rise in food and non-food items. With global developments in the commodities markets with crude trading for USD$71.83bbl, upside risks to inflation remain high with potential fuel hikes likely. If this materializes, cost push inflationary effects will result and could ripple effect the financial markets to manifest through higher interest rates. SADC secretariat warned of an extended dry spell which could weigh food inflation in the medium to long term.
Currency has been under pressure on the back of dollar scarcity on average. Demand for dollars has mounted not backed by conversions from the mines. The markets look to the mines as major convertors of dollars to drive exchange rate strength as they prepare for mining tax obligations in Kwacha. The Kwacha trading range in the quarter has been K9.65 – K10.3/USD.
Business pulse as measured by the Markit Purchasing Managers Index – PMI has been on a decline with July recording 50.3 (readings above 50 represent growing private sector activity while readings below signal contractionary business activity). The last quarter has seen pulse slow from 52.7 to 50.3 a three month low due to price inflationary effects due to currency volatility.
In light of the above mentioned factors, we expect an unchanged monetary policy stance with the BOZ maintaining rates at 9.75% and the statutory reserve ratio at 5%. However, a major threat to the banking sector remains the rising domestic arrears at K13.7billion which have contributed to the rise in non-performing loan stock at 12.7% versus a limit of 10%. This remains a threat to macroeconomic growth which the Ministry of Finance needs to urgently address through an arrears dismantling program.