Zambia Kwacha Weakens to Breach 13 Per Dollar for First Timeby
Surge in borrowing costs seen weighing on economy, consumers
State's intervention may increase as growth deteriorates: ETM
Zambia’s currency weakened, breaching 13 per dollar for the first time, on concern that the government may increasingly intervene in the economy before elections in 2016.
The kwacha dropped as much as 2.3 percent to 13.0650 as of 12:39 p.m. in the capital, Lusaka, on Friday as the greenback strengthened against most major and emerging-market currencies as improving U.S. economic data pushes the Federal Reserve closer toward interest-rate hikes. That decline extended the kwacha’s losses this year to 51 percent, the most among 155 currencies tracked by Bloomberg.
Zambian President Edgar Lungu said this week that he won’t allow Glencore Plc’s local unit to cut about 4,000 jobs and that the nation, which is Africa’s second-biggest copper producer, will find other investors to take over mining operations if the current owners have failed. This comes as the economy heads for the slowest expansion in 17 years because of a power shortage, drought and falling metal prices.
“President Lungu’s recent veiled reference to potential nationalization of mines will further do no favors to investor sentiment, although the President’s comments are likely being made with politicking for next year’s election in mind,” Gareth Brickman, a market analyst at ETM Analytics NA LLC in Stamford, Connecticut, said in an e-mailed note. “Nevertheless, as the economy continues to deteriorate amid the government’s policy errors the risks rise that we see more dirigiste and heavy-handed responses.”
Yields on the country’s $1 billion of bonds due April 2024 jumped 13 basis points to 10.94 percent.
Since taking office in January following the death of his predecessor Michael Sata, Lungu has changed mining taxes while the central bank has also removed limits on interest rates commercial lenders can charge. The government has steadily raised its target for the budget deficit this year from 4.6 percent of gross domestic product to 6.9 percent.
The Bank of Zambia raised its benchmark lending rate by a record 3 percentage points to 15.5 percent on Nov. 3 to rein in prices. The southern African country’s annual inflation rate almost doubled to 14.3 percent in October. Interbank lending rates jumped 321 basis points to 17.92 percent by Thursday, the highest since July 2014.
“Eventually, the heightened cost of funds will transmit to the larger economy,” FirstRand Ltd.’s FNB Zambia unit said in an e-mailed note, adding that losses in the kwacha were exacerbated by dollar shortages. The higher cost of funding “will bear on businesses and individuals and ultimately dampen spending patterns, easing some of the inflationary pressure.”
Barclays Plc is forecasting an expansion of 3.4 percent this year. Prices for copper, which accounts for 70 percent of Zambia’s total export income, have slumped more than 25 percent over the past year.
That’s not all that is weighing on the economy. Zambians have been forced to endure power cuts of as long as 14 hours a day in Lusaka as drought caused water levels to drop at Lake Kariba hydropower plants, which supply the nation with almost half of its electricity. Dry weather has also caused a 22 percent slump in production this year of corn, the staple food, boosting inflation.