MPC - January 2017

Central Banks are at the heart of any economy. Their importance goes back a long time and their relevance today remains crucial in steering any economy forward. It is no wonder that on 20^th and 21^st of January, all eyes were on the bank of Zambia governor Denny Kalyalya and his team as they poured through critical economic data in order to announce to the country there position on how they saw the economy moving forward.

In their statement “The bank of Zamba will closely monitor domestic and external developments and stands ready to take appropriate monetary policy measures on price and financial system stability that support the diversification and growth of the economy”, TFHZPC notes that the committee understands its position in the Zambian economy jigsaw puzzle. Armed with economic data, their decision was to reduce the policy rate 150 basis points (1.5%) to 14%, the statutory reserve ratio by 250 basis points (2.5%) to 15.5%, and overnight lending by 400 basis points to 20%. These tri policy rates are the foundation of how the financial markets play the money markets in Zambia.

Banks will soon be signaling south ward movement on interest rates. The easing is quite substantial for OLF signaling the central banks continued easing of the liquidity in the market. The single digit inflation was a result of an appreciating Kwacha against the green back which has held steady in the K9.7 to K10 range for months.

For industry, premier companies will be looking keenly at the signals from the banks in terms of making decisions regarding their capital structures. For manufacturing, the allure of cheaper money for property, plant and equipment will hard to resist as they prop up production for 2017. Furthermore, with a stable exchange rate, sales projections will be easier to project as well as cost of doing business. Inadvertently, this will affect the decisions on working capital for the year. However, we advise caution as BOZ indicates that there is a current deficit which has persisted. This is where the bank keeps our dollar cover which at the moment stands at 3.3 months import worth. Therefore, premier companies are advised to hedge carefully.

A stable single digit inflation rate means premier companies in the fast consumable goods arena will be cautious not to over price their products. In a stable equilibrium, competitive forces thrive therefore, they must anticipate new entrants coming into their market. Furthermore, low inflation also has a impact on switching costs. What this means is that with new entrants on the market, there will be pressure on incumbents to hold on to customers who will see price friendly products.

For investors looking at premier companies on the stock exchange, BOZ indicates that risk free investments (T-Bills) weighted average yield rate is at 23.6%. Investors therefore will be looking at return on equity north of this region to justify as stake in a premier company. However, this is an optimistic outlook considering that emerging market growth is expected to be in the region of 4.5% (global stands at 3.1%). Therefore, the long game is the most desired approach when considering making an investment.