Zambian economists waited with baited breath for Dr. Denny Kalyalya’s Monetary Policy Committee (MPC) announcement post their March 15th to 16th meeting which had two items on its agenda:
1. Lower the Policy Rate by 150 basis points to12.5% from 14.0%; and
2. Reduce the Statutory Reserve Ratio by 300 basispoints to 12.5% from 15.5%
Well, the announcement was finally delivered on the 17th of May 2017 in a move that will have premier bank firms nodding their heads asthis now offers a means to grow value. Coincidentally, the move by the central banker comes a week after the energy regulator rooted for a northward bound tariff on electricity. We believe the macro forces are seeing equilibrium (Bayesian pundits will be disappointment. All they ever see is negative). Only astute management teams will be able to decode what this will translate to going forward.
In his statement, he pointed out a number of factors the MPC considered which included, verbatim: “The continued decline in inflation, with the inflation forecast to remain well below the 2017 target of 9.0% and within the medium-term target range of 6-8%by early 2019; § The prevailing high lending rates, which continue to constrain access to credit by the productive sectors of the economy, as reflected in the sustained contraction of credit to the private sector; § Deterioration in commercial banks’ assets, reflected in rising NPLs to 10.6% in March 2017 from 10.0% in December 2016; and § Subdued economic growth.”
From our analysis thus far of premier companies, the aforementioned statement echoed throughout many of the Chairman and Chief Executives letters to shareholder holders we review. Dr Kalyalya clearly wants to re-ignite the economy and this will be pleasant news for premier companies.
On the balance sheet, we anticipate that astute Chief Financial Officers will be calling their banks to re-engineer their debt portfolio in light of the coming reduction in interest rates. Furthermore, they will pursue cheaper money which will yield competition in the banking sector. Micro finance firms that offer more expensive money may see a decrease in demand as businesses and individuals seek for cheaper money. For the bold firms in this game, we anticipate an increase in innovation around product offerings.
Consumer spending is likely to be reignited and some premier companies may actually see a better than projected rise in revenue.Furthermore, companies that shelved ideas of investing in property plant and equipment will now have a reason to reinvest in depreciated assets. Movement in investment activities in the cash flow statement is highly likely for companies whose machinery is fast approaching residual value.