Zambia is swimming against the developing-nation tide by propping up its currency while peers from South Korea to the Czech Republic seek to devalue theirs.
The African nation’s crackdown on speculators selling the kwacha turned it into the second-best performer among more than 150 currencies tracked by Bloomberg in June, after posting the world’s biggest loss in May. Zambia’s currency will extend last month’s 9.4 percent gain and end the year more than 5 percent stronger at 5.95 per dollar, according to FirstRand Ltd., Africa’s second-biggest bank.
In actions reminiscent of the competitive devaluations of 2010, developing nations across the world have in recent months intervened in foreign-exchange markets or cut interest rates to deter investors from buying their currencies and making their economies uncompetitive. Zambia, facing the challenge of its first budget deficit in five years, raised rates to boost the kwacha’s appeal while making it more expensive for local banks to hold dollars.
“Though the latest measures imposed by the Bank of Zambia on commercial banks might seem punitive, they’ve succeeded in curbing speculative trade, providing much-needed respite to the kwacha,” Nema Ramkhelawan, a Johannesburg-based analyst at Rand Merchant Bank Ltd., FirstRand’s investment-banking unit, said by phone on June 25. “It’s still undervalued but it’s likely to recoup losses against the dollar as liquidity conditions begin to normalize.”
The kwacha strengthened to a three-month high of 5.9672 per dollar on June 20, after climbing from a record-low of 7.2522 on May 28. It closed at 6.265 today.
The only assets to outperform the kwacha last month were Papua New Guinea’s kina and silver, which rose about 12 percent. Zambia’s currency also eclipsed gains in stocks, with the MSCI Emerging Markets Index gaining 2.2 percent.
Still, the kwacha has lost two-thirds of its value since early 2010 as copper, which accounts for 60 percent of Zambia’s exports, fell in March to an almost four-year low.
“The direction of the kwacha was a one-way street in the first half of the year,” Dumisani Ngwenya, an analyst at Barclays Plc in Johannesburg, said by phone on June 27. “Some of it was due to hedging by corporates, and there was also an element of speculation. The central bank wanted to eliminate that. As long as they keep things tight, there’ll be support for the currency.”
As well as raising its benchmark lending rate to 12 percent in March, the Bank of Zambia lifted the overnight rate, making it more expensive to bet on kwacha declines. Policy makers also restricted domestic banks to one transaction a week in overnight loans and ordered banks to hold reserves against dollar accounts.
The kwacha accelerated its decline this year, tumbling 20 percent from January through May, as the nation reported a $261 million shortfall in its current account in the first quarter. As well as the drop in copper, an increase in spending on civil servants’ salaries and fuel and corn subsidies contributed to the deficit.
Talks with the International Monetary Fund about an aid program that may include loans have bolstered investor confidence in the nation, sending the yield on Zambia’s $1 billion Eurobond due in 2024 to a record-low 6.91 percent in June and supporting the kwacha.
An IMF program would provide a “comfort blanket for investors,” David Cowan, the London-based director of economic and market analysis at Citigroup Inc., the world’s biggest currency trader, said by phone on June 10. “They can see that the country is meeting the targets.”
Not everyone buys into the idea of the kwacha as a long-term winner. With copper production forecast by the government to almost double by 2016, prices will stagnate and weigh on the currency, according to Irmgard Erasmus of NKC Independent Economists in Paarl, South Africa.
Zambia is Africa’s second-biggest copper producer. Its other exports include sugar, tobacco and cotton.
“We remain quite bearish on the kwacha over a 12-month period, despite the aggressive central-bank tightening,” Erasmus said by e-mail on June 27. “Due to large sector concentration and a narrow export base, coupled with strong capital goods imports, we expect the terms of trade to deteriorate this year, keeping the kwacha on the back foot.”
Bulls point to Zambia’s measures to get its fiscal house in order and lure foreign investors.
The government plans to shrink the deficit in its budget to 6.2 percent of gross domestic product this year from 6.8 percent in 2013, Treasury Secretary Fredson Yamba said on June 6. Using a re-based GDP calculation that shows the economy to be about a quarter bigger than previously thought, 2014’s deficit will be 5.2 percent and the government plants to cut it to 3 percent over the medium term, he said.
Demand for Zambia’s Treasury bills exceeded supply at an auction on June 13 for the first time since February, with overseas money managers doing most of the buying, according to the central bank.
“You’ve seen considerable interest from foreign investors,” FirstRand’s Ramkhelawan said. “And why wouldn’t you be attracted to that market, especially when the currency is strengthening?”