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Market Report Fortnight ending 06th December 2002 Report
24/02
Foreign Exchange Reserves
The official foreign exchange situation soared when
the closing position for November 2002 stood at US$131.93
million, representing 2.21 months of import cover. This
is, however, a seasonal trend in the foreign exchange
market. During this time of the year, the demand for
forex increases as businesses import in preparation
for the approaching festive season while the supply
of foreign exchange slows down as the economy passes
through its forex lean period. However, the situation
has this year been execarbated by the increased FX requirements
for importation of maize and the withholding of aid
by the donor community, which has inevitably effected
the economy’s traditional supply of foreign exchange,
more especially during this lean period.
The pressure on the forex reserves has impacted negatively
on the kwacha exchange rate. This witnessed the kwacha
market exchange rate deteriorate sharply to MWK84.00
per US Dollar from MWK81.30 during the previous fortnight.
The excess demand for foreign exchange coupled with
the speculative tendencies of the business community
may lead to further depreciation of the kwacha in the
short and medium term.
Financial Markets and Interest Rates
The increased issue of the government paper has seen
a leveling off of yield rates on the Treasury Bills
market after consistently declining for over a month.
According to auction results for 29th November, the
treasury increased its indicative issue requirement
from MWK500 million to MWK700 million. This notwithstanding,
bids at purchase value amounted to MWK485.8 million,
falling short of the required amount.
This saw the yield rate for the 273 days bill increasing
slightly to 38.46% from 38.42% recorded on 22nd October.
However, the rates for the 91 and 182 days bills declined
to 36.88% and 37.45 from 36.96% and 37.72%, respectively.
The registered shortfall in the allotment of Treasury
Bills will likely see a firming up of yield rates during
forthcoming auctions.
US Economy
The Institute for Supply Management (ISM) reported
this week that its November non-manufacturing index,
a measure of the service sector of the U.S. economy,
rose to its highest level in six months. The index rose
to 57.4 from 53.1 in October above projections for a
rise to 53.7. This is said to be the 10th straight monthly
gain in service sector activity. A reading above 50
indicates expansion while a reading below 50 indicates
contraction. The data illuminated the divergence between
recovering services and lagging manufacturing. The ISM's
manufacturing index edged up to only 49.2 in November,
confounding market expectations of a reading well above
the 50 mark, a scenario that has made markets more nervous
of U.S. recovery prospects.
Euro Zone
European Central Bank (ECB) lowered key interest rates
by 50 points at their meeting on Thursday, 5th December
to 2.75% from the previous level 3.25%. This was the
first rate cut in over a year by the ECB in what was
a widely anticipated move. The reduction of interest
rates follows persistent near-to-stagnation growth outturns
by big Euro Zone countries like Germany and indications
that the Euro Zone economy may shrink in the first quarter
of next year by as much as 0.2 percent, according to
a model used by the European Commission. Lowering borrowing
costs is immediately anticipated to spur business and
consumer confidence in the economic grouping largely
seen as sickly in recent months.
Regional Emerging Markets
Zambia
Zambian authorities have revised GDP growth projections
downward to 3.6% from 4.3% owing to severe food shortages
affecting the country. Approximately 3 million Zambians,
about 27% of the population, are in urgent need of food
aid. They are among the almost 15 million people facing
severe food shortages in six southern African countries
emanating from severe drought. The 3.6% growth is mainly
anticipated to derive from mining, manufacturing and
the retail sector. Despite the threat of increasing
food prices arising through the effects of maize importation,
inflation is expected to conclude the year at 16%. Earlier
in November the central bank put inflation in the year
to September at 23.8%, compared to 23.6% in the year
to June and 18.1% in the year to March.
In forecasts availed to the International Monetary
Fund (IMF) and World Bank in May of 2002, Zambia envisaged
inflation would fall to 8.0% in 2003 and 5.0% in 2004,
from a projected 13% in 2002. Year-end inflation in
2001 was 18.6%. Zambia forecast real GDP would expand
by 4.3%. Zambia's GDP figure currently lies at US$3.8
billion, according to the IMF.
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