BOZ ex­pected to keep rates un­changed this week - con­tin­ued

Zambian Business Times - - BUSINESS REVIEW -

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.

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