VAT and Cor­po­rate Tax Net Offs, As­set Selloff, Dol­lar Fetish and Busi­ness Pulse Rise Weaken Kwacha

Zambian Business Times - - FRONT PAGE -

THE Kwacha, Zam­bia’s cur­rency has come un­der pres­sure in the last two months em­a­nat­ing from var­i­ous fac­tors key of which are tax - net offs, as­set sell­offs and rise in busi­ness pulse. As at 26 Nov the Kwacha was trad­ing for ZMW9.8/USD af­ter break­ing the ZMW10/USD bar­rier in in­tra­day trad­ing on 25 Nov.

VAT and Cor­po­rate Tax Net Offs

It’s time for cor­po­ra­tion tax pay­ments as Q3 earn­ings for cor­po­rates have been re­ported. How­ever tax­a­tion pay­ments are made in Kwacha which ide­ally should push de­mand for the lo­cal cur­rency higher. For cor­po­rates that earn in dol­lars, this time is char­ac­ter­ized by mas­sive con­ver­sion of dol­lars to fund Kwacha tax pay­ments. This time it’s an in­ter­est­ing para­dox as some big cor­po­rates that usu­ally sell dol­lars for Kwacha to meet tax obli­ga­tions are owed Value Added Tax - VAT re­funds. The govern­ment owes VAT re­funds in ex­cess of $400mil­lion which is paid out in Kwacha. So in­stead of ac­tual con­ver­sions tak­ing place the tax au­thor­i­ties are net­ting off the VAT re­fund with the tax due from the cor­po­rates. This has the net ef­fect of damp­en­ing Kwacha de­mand the mar­ket ex­pe­ri­ences when cor­po­rate tax pay­ments are due. This quar­ter will not see as much Kwacha de­mand for tax pay­ments as the bulk of pay­ments will net­ted off VAT re­funds. This is the big­gest source of pres­sure on the Kwacha.

As­set Selloff

Most in­vestors that took po­si­tions on Zam­bia on the back of a po­ten­tial In­ter­na­tional Mon­e­tary Fund - IMF deal have ex­ited po­si­tions due to weari­ness of the wait. It’s a “sheep sheep come home we are afraid of the lion’” type of sce­nario where in­vestors were lured into tak­ing po­si­tions with an IMF pack­age in their minds by for 8 quar­ters this has not hap­pened. In­vestors then de­cided to sell off their po­si­tion in bonds and are con­vert­ing the pro­ceeds to dol­lars and then repa­tri­at­ing the funds off­shore. With Gold and Cop­per at 3yr peaks most ra­tio­nal in­vestors would rather lock in cash hold­ings in these as­sets. This process has put the Kwacha un­der pres­sure by de­fault. This tra­jec­tory was ob­served start­ing Au­gust af­ter the ex­pected board meet­ing would ap­prove Zam­bia’s $1.3bil­lion pack­age but in vain. The Min­istry of Fi­nance shifted goal posts to Oc­to­ber – last month – when the World Bank and IMF had their an­nual meet­ings. How­ever what came out of the side­line meet­ings was that Zam­bia’s debt pro­file needed at­ten­tion be­fore the IMF would even table a pack­age. This news has con­tin­ued to price in the mar­kets caus­ing more weari­ness in the in­vestor. One thing we are cog­nizant of is that Zam­bia has never tabled a pack­age dis­cus­sion and the na­tion still grap­ples with meet­ing the cri­te­ria which can only be ticked off af­ter debt con­cerns are dealt. It’s in­ter­est­ing that the dol­lar debt (Eurobonds) credit spreads have not widened as much as off­shore hold­ers are more ex­cited about a cop­per price over $7,000 met­ric ton that any­thing else. Suf­fice to say news about a de­te­ri­o­rat­ing debt pro­file priced in the Eurobonds but was over­shad­owed by a bullish cop­per price which is too good to be true against all odds. So the as­set selloff is source tow of pres­sure on the Kwacha.

Dol­lar Fetish

Min­istry of Fi­nance has re­leased funds to­wards a num­ber of agri­cul­ture projects which most re­cip­i­ents con­verted to dol­lar push­ing dol­lar de­mand higher. On 25 Nov we re­ported that the Min­istry of Fi­nance re­leased a to­tal of ZMW 515mil­lion aimed at set­tling Food Re­serve Agency pay­ments owing and the E-voucher farmer in­put sup­port pro­gram. These mon­eys are sup­posed to fund avail­abil­ity of agri­cul­ture in­puts for the farm­ing sea­son. The Min­istry paid out ZMW 115mil­lion to­wards FRA set­tle­ment of pay­ment in re­serve food pur­chas­ing chain and has a fi­nanc­ing plan to pay out another ZMW 85mil­lion in a fort­night. Ear­lier the Min­istry dis­bursed ZMW 400mil­lion a few days ago to­wards the e-voucher pro­gram for farmer in­put sup­port to en­sure smooth man­age­ment of af­fairs con­cern­ing in­put sup­ply man­age­ment.

Busi­ness Pulse Rise

Septem­ber Pur­chas­ing Man­agers In­dex – PMI for Zam­bia was at a 31month high of 52.5 (a PMI of above 50 rep­re­sents an ex­pand­ing econ­omy while that be­low 50 sig­nals con­trac­tion), a vivid in­di­ca­tion that the econ­omy is grow­ing as Zam­bia tar­gets 4.3% in 2017 and 5.1% in 2018. The na­tion has many projects that are ex­pan­sion­ary in na­ture that have fu­eled im­por­ta­tion of raw ma­te­ri­als which have to be funded in dol­lars. With a por­tion of the bud­get al­lo­cated to­wards road con­struc­tion we are likely to see more im­ports of raw ma­te­ri­als which will fuel dol­lar de­mand to ul­ti­mately put more pres­sure on the Kwacha. The fact that Zam­bia is an im­porter makes dol­lar fetish higher. It may sound ab­surd but growth in the Zam­bian econ­omy which is a net im­porter means higher dol­lar de­mand to fund im­ports.

Medium Term View of Kwacha

The Kwacha is ex­pected to weaken fur­ther to above ZMW10/USD over the next 1 week how­ever may have some of its pres­sure ab­sorbed from de­mand for Kwacha trea­sury bills and bonds whose yields are ex­pected to some­what tick up­wards. With cop­per trad­ing higher at cur­rent lev­els, dol­lar sup­ply should nor­mal­ize in the re­main­ing quar­ter of 2017.

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