The Zambian kwacha has gained ground over the past week, leading to a monthly gain of 3.6 percent, according to RMB. The investment bank attributes the recent performance to central bank intervention in the market as it supplied dollars early last week when the market was tight on liquidity.
Furthermore, Danial Kavishe, the economist with the bank explained that the recent bond auctions over the past two weeks have also led to improved sentiment across the market as foreigners mopped up local paper. While these factors have greatly supported the kwacha, he reiterates that the movements are transitory, with a broad expectation that the currency is likely to head back on a depreciatory trend over the next months. “In the short term, we see the gains leading to levels closer to 17.00 against the dollar. The currency is expected to weaken to levels closer to 18.50 by mid-March. Key upside risk will be based on central bank intervention, which could dampen the pace of weakness in subsequent months,” he says.
USD/ZMW historical performance
Source: Bloomberg, RMB Markets
Overall, until the debt restructuring efforts are finalised, the bank expects the kwacha to remain on the back foot noting, however, that sentiment is improving in the market with respect to the sovereign. With export earnings expected to remain elevated and as the new government ramps up reforms, the economy is set to continue its recovery over the next few years. The latest upgrade by S&P global ratings on the country’s long-term sovereign rating from CCC- to CCC+ with a stable outlook, cements Kavishe’s view.
The rating agency expects the fiscal position to improve over the medium term and further expects finalisation of debt restructuring over the near term. S&P reiterated that it expects that local currency debt will not be included during the debt restructuring efforts. The agency further believes the government has sufficient fiscal policy room to maintain its debt servicing costs on local currency debt. “We share the same sentiments, with the latest upgrade asserting our broader views on credit ratings improving over the next few years,” Kavishe says.