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Headline inflations slows to a more than two-year low in March

April 1, 2022by Nicholas Kabaso
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Local Market Commentary

  • Price pressures in Zambia continued to ease in March. Specifically, headline inflation slowed to a more than 2-year low of 13.1% y/y from 14.2% y/y in February. This was the eighth straight month price growth in the economy has slowed and resulted from an easing in food and non-food price growth. The former slowed to 15.3% in March from 16.0% in the month prior, while non-food inflation decelerated to 10.3% from 11.8% in February. 
  • The continued deceleration in inflation may see the Bank of Zambia (BoZ) decide to keep its policy rate unchanged at the May meeting. That said, it will need to assess the impact of surging agricultural commodities and oil prices caused by the Ukraine War. While Governor Denny Kalyalya in February said the BoZ expects inflation to continue trending towards its 6-8% target range over the next eight quarters, averaging 13.2% this year and 7.3 % in 2023, it is worth flagging that upside risks to the outlook exist. These include higher commodity prices, especially oil and wheat, amid the ongoing war in Ukraine, tightening global financial conditions, and a weaker Kwacha. While a waiver of 15% wheat import duty should be positive for consumers, it could be offset by the removal of fuel prices as pump prices inevitably increase. 
  • Regarding the Zambia Kwacha, it has started 2022 on the back foot and is amongst the worst performing African currencies against the USD on a year-to-date basis. The local unit has struggled mainly on the back of a dollar liquidity shortage, and the weakness is set to persist in the near-term. The BoZ had to intervene in the market this week, injecting some liquidity to cover strategic demand pipelines. Going forward, aside from central bank intervention,  the finalisation of the International Monetary Fund programme will also be key to the local currency’s performance. Approval of the programme could provide some fresh impetus for the Kwacha and potentially see it reverse its current course.
  • Meanwhile, economic growth in the final quarter of 2021 slowed, coming in at 2.1% y/y from a downwardly revised 3.3% y/y (prior:3.5% y/y) in Q3. This marked the slowest pace of growth since Q1 2021. For 2021, Zambia’s economy expanded by 3.6%  from a contraction of 3.1% in 2020. According to ZamStats, the improvement in growth was due to the positive performance of the information and communication industry. However, mining and quarrying, education, and public administration contributed negatively to growth.
  • On the global front, China’s economy is stumbling at the moment given the spike in domestic COVID-19 cases and the fallout from the war in Ukraine. The Caixin/Markit Manufacturing Purchasing Managers Index fell to 48.1 for March which is the steepest rate of contraction since February 2020. Given this backdrop the expectation by the analytical community is that Beijing will react swiftly with fiscal support via infrastructure projects and potentially tax and fee reductions.
  • Beyond the geopolitical tensions in Europe, focus today will also turn to the release of the latest U.S. nonfarm payrolls data, which will offer further insight into the country’s inflation dynamics. The labour market is tightening, and this comes over and above a strong PCE reading yesterday, which further underpinned expectations that the Fed would need to hike interest rates more aggressively through the months ahead. Ahead of the payrolls data, the USD regained some of its composure to help the EUR trade back down to 1.1070. Not much change to the GBP, although the JPY did depreciate to over 122/dlr.

Rand and International FX Commentary

  • South Africa’s trade surplus has risen from January’s R4.07bn to a surplus of R10.6bn in Feb. Although lower than the expected 21.9bn, it still represents a healthy number. The vehicle sector was the main contributor to growth in exports from South Africa in February, increasing by R7.7bn, a 79% rise. This more than offset a decline in precious and base metals exports. However, it should be noted that it captures SA’s export performance before the Russia-Ukraine war, which boosted commodity prices. Commodity prices are expected to remain elevated, which will also be a factor that should continue to support South Africa’s trade account and, therefore, the ZAR. Meanwhile, the chance of import demand increasing is limited, given the weak state of the economy. Therefore, we could see SA’s trade surplus continue to widen in the coming months to lend further resilience to the ZAR.
  • It is just one more set of data released this week that is ZAR supportive and again offers perspective on where the resilience of the ZAR comes from. Underlying demand for imports remains weak, trade dynamics for SA’s exports remain strong, while the risk associated with SA’s fiscus has subsided. Add to that SA’s carry attractiveness even amongst its EM peers, and the bias remains entrenched in the ZAR’s favour, even though some periods of correction will be necessary and healthy to maintain the current trend.
  • Today holds two more data releases that hold broader implications for the currency. Vehicle sales as a leading indicator of demand will offer a fresh perspective on the state of the SA economy. At the same time, the manufacturing PMI has some insight into how SA’s productive sector contributes to exports and competes with imports. Equally, if not more important than both, will be Moody’s review of SA’s credit rating.
  • Although Moody’s usually announces any reviews of SA’s credit rating after hours, this still holds the potential to influence the ZAR’s performance and set the stage for the week ahead. A combination of the commodities windfall, the improvement in fiscal data that points to the prospect of a smaller than expected budget deficit and the proposed reforms from the government will all assist SA at the margin. Less constructive will be the state of Eskom, Transnet and other SOEs, coupled with the record high unemployment rate and the structural constraints the economy faces. However, there should be enough to shift the outlook from negative to stable. At the margin, this would lend some credibility to the slow progress SA is making, albeit that the commodity supercycle may be making many of SA’s ills.

Nicholas Kabaso

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