This week, two significant things happened. Episode 4 of Game of Thrones finally shifted into high gear whilst the Central Bank of Zambia lowered the policy rate by 150 basis points (1.5%). Although premier companies will not be focused on the leadership of John Snow, the Governor Danny Kalyaya was clearly in the spotlight as he delivered what many of us believed would be an inevitable move that was focused on freeing liquidity from the “clutches of old” (fiscal policies gone rouge).
In the last quarter, it is clear that exogenous forces compelled the committee to act. Their mandate on monetary policy is clear. It is the process by which Bank of Zambia controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. TFHZPC believes they are intent to deliver as signaled by their reasons for the move which included (verbatim from presentation):
• Sustained decline in inflation over the last seven months, with inflation being firmly anchored in single digit levels;
• Inflation projections, which suggest that inflation will remain within the medium-term target range of 6-8% over the next 8 quarters;
• The prevailing high cost of credit, particularly to the productive sectors of the economy;
• Sluggish growth in credit to the private sector;
• Deterioration in commercial banks’ assets as reflected rising nonperforming loans; and,
• Weak economic growth.
We have no doubt that their move is clearly to inspire premier companies to unlock value. The committee believes it can piggy back on the projected growth outlook of 3.5% in 2017 of emerging markets and developing economies such as ours. This is backed by signals of stronger commodity prices and the resurgence of the dragon (bullish on China).
Furthermore, the central banker is keen on easing liquidity and has exposed its strategy on this front. For example, in order to keep the interbank rate within the policy rate corridor, the bank withdrew K10.8 billion through Open Market Operations (OMO), up from K4.0 billion in quarter 1 of 2017.
Of note however is the insatiable appetite that international investors have for Zambian securities. BOZ states that non-resident investors’ holdings of Government securities increased to K7.5 billion in Q2 from K6.9 billion in Q1 2017. Zambia clearly is an attractive destination for fund managers whose motives are to create value.
For premier companies looking at increasing their long term debt in order to invest in replenishing or beefing up their PPE, the weighted average Treasury bills yield rate fell to 15.7% in June 2017 from 20.8% in March 2017. In addition, the weighted average Government bond yield rate declined to 19.3% from 20.4%. What this means is that companies that have facilities that are tied to the tBill rate, they will enjoying easing of their repayment obligations going forward. This will inevitably improve earnings positions for companies that have such facilities.
Astute investors who have been keeping an eye on Governments appetite for local credit will be pleased with the Credit to Government expanding at a slower pace of 11.3% compared with a growth of 18.1% in Q1 2017. Crowding out has been inevitable hence why this move inadvertently lead to credit to private enterprises growing by 1.6%, partially reversing a contraction of 4.8% in Q1. As if someone has been reading Adam Scott’s “Wealth of Nations”, this move will inspire more private sector participation in local debt.