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Zambia to impose penalties for quoting prices in dollars

February 19, 2021by Nicholas Kabaso
  • Commerce Trade and Industry Minister Christopher Yaluma was on the wires stating that Zambia is set to amend the law governing operations of the Bank of Zambia to include penalties for quoting prices in dollars. The potential move comes as Zambia is becoming increasingly con-cerned with the growing trend of pricing materials and rentals in dollars, contributing to the surge in inflation.
  • Copper remains on the front foot as we enter the final trading session for the week. The copper price was up by as much as 1.1% this morning in Asia with the benchmark LME 3m contract hitting $8646/tonne marking a fresh 9 year high. Drivers of the gains include a weaker USD, strong hopes of an economic rebound, and falling inventories. LME copper inventories are currently sitting at 76025/tonnes while the premium for spot over forward copper is rising showing tighter near-term supplies.
  • In the fixed income markets, Zambian Eurobonds surged to their strongest levels since March when the government indicated that it plans to restructure external debt. Such proactive restructuring means that existing bond holders might suffer much smaller losses than was priced into the bond markets. Zambia became Africa’s first defaulter as copper prices tumbled, but its actions to restructure will earn them the support of the IMF. All that notwithstanding, the probability is that existing bond holders will still suffer a haircut of approximately 20% on their bond holdings. Zambia will seek to restructure some $12bn of external borrowings, including $3bn in Eurobonds and a similar amount of loans se-cured from Chinese, state-owned lenders.
  • On the international front, stimulus appears to be the major theme through 2021 even though the economy looks set to stage a solid recovery through 2021. On the one hand, the authorities both fiscal and monetary like to look past the current pandemic to better times ahead. On the other, they draw attention to the weak state of the economy and are seeking for all ways to justify persisting with currently expansive policies or injecting more stimulus. Treasury Secretary Yellen has again reiterated the need to unleash more stimulus to help the economy back to a full recovery and full employment, while the Fed’s Brainard has similarly confirmed that the Fed will remain equally supportive of the econo-my.
  • Yesterday’s weekly jobless claims data disappointed and in the process strengthened the arguments for more stimulus. The data will be used to justify the strong fiscal stimulus that the Biden administration is seeking to implement, with the latest data confirming that the recovery in the labour market is stalling. Looking forward, the infection and death rate numbers have improved, while the vaccination drive is unfolding with increasing momentum. Although the economy will likely recover to boost overall jobs regardless of the stimulus efforts, the window of opportunity to use weak data to justify the stimulus is closing fast. Expect the Biden administration to announce the stimulus measures soon.
  • PMI data will be released today and will hold some interest as investors look for clues on the state of the underlying economy. Markit’s PMIs for the US are hovering near their recent peaks as the economy has shown some signs of staging a fairly significant economic recovery. Surpris-ingly, the services sector index remains elevated despite many firms unable to operate at full capacity given the pandemic. With the recent ar-rival of vaccines, we should see sentiment in both the services and manufacturing sectors remain fairly upbeat, especially given the recent progress made on the fiscal stimulus front which will be boosting sentiment. The February numbers are not expected to deviate significantly from the January figures, which will suggest that the economic recovery is persisting. The downside risks to the readings come from the labour subcomponent, given that jobless claims have been rising over the last few weeks.
  • In the FX markets, the Kwacha is seen as remaining on the defensive next week, given limited foreign exchange inflows amidst rising expendi-tures, especially on imports of farming inputs. Meanwhile, Some weaker than expected jobless claims data and talk of the need for more stimulus from both the Treasury Secretary and Fed speakers has the USD on the back foot once more. This is not surprising given that such stimulus will serve to further widen the budget and trade deficits through the coming months, while elevating the risk of an inflation episode. Money supply growth has been extreme creating the space for inflation to take hold and the USD to once again erode weaker. The combina-tion is likely to keep the speculative element in the market positioned for more USD weakness through the months ahead.

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Nicholas Kabaso

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