Macro Analysis /

Zambia leaves rates on hold, Nigeria PMI slides to a 6-month low

  • Bank of Zambia’s holds its policy at 8.5% as a strong advance in the Kwacha helps cool inflation

  • Rally in Zambian Eurobonds stalls on Wednesday, broader bullish bias remains intact

  • Nigeria’s economy-wide PMI falls to a 6-month low in August

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
2 September 2021
Published byETM Analytics


It will be another busy data day today with further insight into US labour market dynamics coming from the weekly jobless claims that will be viewed in the context of yesterday's disappointing ADP data. Although the data improved, it missed expectations through August and investors will be hoping for some improved data today or the USD could take another beating as investors push out expectations for the taper. Durable goods orders will take a back seat today given that it is the final reading, but revised unit labour cost data will hold some interest as offering further insight into the labour market.

For now, the USD remains on the defensive and the slide was assisted by the ADP data which came in softer than expectations. The focus now shifts to the remaining data this week for insight into whether the Fed might stall its taper. Investors are still convinced that the taper will start before the end of the year. However, there are indications from Fed members that the central bank will be in no hurry to moderate its asset purchases without clear indications that the economy was on a sustainable recovery path.

Globally, markets are swinging to the timing of the Fed taper given the amount of USD liquidity in the system. The fact of the matter is the world is awash with dollars and the market has become used to this. Tactically a withdrawal of dollars from the system will be negative for the gold markets but there are still strategic long buyers who view the current macro backdrop as inherently risky given the threat of inflation and currency debasement. 

The base metal counters were focused on the release of another 150 000 tonnes of product by Beijing into the market yesterday. Reuters reported that visibility on the auctions was limited but all the copper was sold off well before the end of the morning session, with sales at a discount of at least 1,300-1,500 yuan ($201-$232) per tonne to market prices, industry data provider Shanghai Metal Exchange Market (SHMET) said. Equally relevant to the market was the swathe of PMI numbers released globally yesterday which for the most part did not make for good reading. Manufacturing activity slowed in many parts of Asia and Europe which pressed the likes of copper which is regarded as the bellwether of global economic conditions.


Ethiopia: In a move aimed at slowing inflation, the central bank of Ethiopia doubled the statutory reserve requirement for commercial lenders and increased the amount of foreign currency they must remit to the bank. The reserve requirement increased to 10% effective from September 1. Banks will also be required to transfer 50% of their foreign-exchange holdings to the central bank, compared with 30% previously. National Bank of Ethiopia’s vice governor Fikadu Digafe was quoted as saying, “the new measures are aimed at reducing the money circulating in the economy. We needed to tighten the monetary policy due to the higher inflation pressure in the country.” According to the directive, the central bank plans to give lenders a local-currency equivalent of the amount of foreign money they remit. Banks were also requested to allocate 1% of their loan portfolios to buying debt issued by the government-owned Development Bank of Ethiopia.

Ghana: According to the Institute of Fiscal Studies (IFS), Ghana is currently losing out on its revenue generation due to poor negotiations and should revisit agreements involving its oil and extractive sectors. The IFS compared Ghana’s earnings in the oil sector to that of Nigeria and Botswana, saying that Nigeria is earning 51% of their oil revenue and Botswana is getting 65% while Ghana is getting 16%. Research Fellow at the IFS Dr Adu Owusu Sarkodie was quoted as saying, “we have to try to negotiate our oil deals if they are not going to cost us too much. If we cannot renegotiate, then we have to forget about it and look into the new discoveries. We are not part of the production process in our extractive sector. We are only taking royalties.”

Nigeria: Local papers quoting National Primary Healthcare Development Agency Faisal Shuaib suggest that the Nigerian federal government is considering imposing sanctions on individuals who refuse to accept vaccines. Shuaib was quoted as saying, “if some individuals refuse to take the vaccine, hence endangering those who have or those who could not due to medical exemptions, then we have to apply the basic rule of law, which stipulates that your human right stops where mine begins.” Shuaib added the government was exploring ways of making more vaccines available to Nigerians.

Tanzania: Tanzania’s gold exports rose to $3bn in the 12 months to the end of July, up 9.9% compared with the year-earlier period. According to the central bank, the increase in exports from $2.73bn a year earlier was largely thanks to relatively high gold prices in the world market. The average price of the yellow metal on the global market rose 16% y/y to $1,846.80 a troy ounce in the 12-month period as uncertainty surrounding the coronavirus pandemic pushed investors toward safe-haven assets. Increasing gold exports will further bolster Tanzania’s foreign income.

Zambia: The Bank of Zambia yesterday reported that gross international reserves rose to $1.4bn, equivalent to 2.6 months of import cover, at the end of June 2021 from $1.2bn (2.1 months of import cover ) at the end of March 2021. At the end of August 2021, international reserves rose further to about $2.9bn (5.4 months of import cover) following the IMF SDR937.5mn allocation ($1.33bn) and market purchases. The central bank net purchases amounted to $152.4mn in July and August. Improving reserve levels should provide further support to the Zambian Kwacha.

Mozambique: Economic recovery hopes received a boost yesterday after the Health Ministry announced that more than one million people had been completely vaccinated against COVID-19. This represents roughly 6.3% of the population of those older than 15 years. The Ministry said in its statement published yesterday that this milestone is encouraging, given the importance of vaccines to prevent the occurrence of severe forms of the disease and for avoiding deaths due to COVID-19. Recall that Mozambique kicked off its vaccination program in March with a focus on vaccinating frontline workers such as health professionals and police officials. The mass vaccination program was rolled out on August 4. According to Reuters data, both the daily new infections and daily death rates have fallen sharply in recent days after surging in July and the first half of August.

Forex: Bank of Zambia’s holds its policy at 8.5% as a strong advance in the Kwacha helps cool inflation

As widely anticipated, the Bank of Zambia kept its policy rate unchanged yesterday, with inflation seen as decelerating faster than earlier expected. Specifically, policymakers kept the benchmark interest rate at 8.5%, with the underlying rationale being the expectation that over the forecast horizon, inflation is projected to decelerate faster and edge closer to the target range than was envisioned in the May 2021 MPC meeting. Underlying the decline in inflation is mostly the favorable outlook for the exchange rate and improved prospects for fiscal consolidation. Policymakers also noted that they were also mindful of subdued economic activity and existing vulnerabilities in arriving at the decision.

Inflation in Zambia over the next eight quarters is forecast to decelerate faster than expected, although it will remain above the 6-8% target range. Inflation is now estimated to average 22.6%, 15.5%, and 11.9% in 2021, 2022, and the first half of 2023, respectively. Regarding the outlook, policymakers indicated that some of the previously dominant risks, such as the depreciation of the Kwacha, had subsided. This follows a recent world-beating rally that has seen the Kwacha become Africa’s best-forming currency against the USD up by 32.28% on a year-to-date basis. Prospects of securing an IMF deal earlier than expected and receipts of SDRs from the IMF have in part supported the currency. The appreciation trend of the Kwacha and improved prospects for fiscal consolidation are therefore seen as contributing to lower inflation expectations. However, the potential increase in domestic energy prices and COVID-19 related supply disruptions are seen as posing upside risks.

It is worth noting that policymakers indicated that they remain committed to adjusting the policy rate upwards should the disinflationary process be slower than expected. However, should the Kwacha continue to firm driving inflation lower and significant progress is made on the debt front, we are of the view that policymakers could maintain their current policy stance for the foreseeable future.

Fixed Income: Rally in Zambian Eurobonds stalls on Wednesday, broader bullish bias remains intact  

Zambia remained in the fiscal spotlight yesterday as the country’s Eurobonds suffered their worst day of trade in more than two months on Wednesday after newly elected President Hakainde Hichilema said public debt is higher than the previous government’s official figures. Zambia’s 2024 Eurobond yield closed the session 59bps higher at 18.58% on Wednesday.

While Zambian Eurobonds came under significant selling pressure yesterday, the broader bias remains decisively bullish and the best performing African bonds by a long shot in recent weeks. The 2024 Eurobond yield has shed more than 700bps since August 11 on the back of the landslide victory of President Hichilema, who has vowed to sort out the country’s fiscal problems.

As mentioned in yesterday’s note, debt transparency will be paramount in securing a deal with the International Monetary Fund, as well as in restructuring talks with creditors. Recall that Zambia became Africa’s first COVID-era sovereign to default last year. Looking forward, we remain bullish on the outlook for Zambian bonds, however this is contingent on the government striking a deal with the IMF.

Until a deal with the IMF is secured, we expect a significant fiscal premium to remain baked in. Despite the unprecedented fall in Zambian Eurobond yields in recent days, Zambian hard currency bond yields continue to trade well above their peers, reflecting the precarious fiscal position that the country finds itself in.

Macroeconomic: Nigeria’s economy-wide PMI falls to a 6-month low in August

The pace of recovery in Nigeria’s private sector fell sharply in August as a spike in COVID-19 cases dampened demand and weighed on sentiment. IHS Markit PMI data released on Wednesday showed that Nigeria’s economy-wide PMI fell from more than a 1-year high of 55.4 in July to 52.2, the lowest level since February. While Nigeria’s PMI fell notably in August, it must be noted that the gauge remains buoyed well above the 50.0 neutral level, suggesting that Business conditions in Nigeria's private sector improved last month.

Markit said in the report that softer upticks in output, new orders and employment contrasted with quicker expansions in held inventories as firms seek to take advantage of faster lead times and protect against any future supply shocks. However, a loss of momentum in demand resulted in a dip in optimism. On the pricing front, Markit said purchase prices continued to rise sharply in August, although the rate of inflation softened from that seen in July.

Looking ahead, Markit noted that sentiment was the third-weakest in the series history. Panel comments suggested the longer-term economic implications of COVID-19 weighed on optimism. Commenting on the performance of the economy, Finance Minister Zainab Ahmed said Nigeria's impressive Q2 economic growth would have been better if the country had been more secure, adding that insecurity and other factors slowed growth in the agriculture sector. Minster Ahmed noted that the service sector recorded a strong performance in Q2.

As mentioned in recent commentary, while the Q2 GDP reading was encouraging, the outlook for Nigeria’s economy remains gloomy as the country continues to face soaring infections against the backdrop of severe structural challenges which are yet to be addressed.