My brother Mwiya Musokotwane (MM) shares some very important comments on the S&P negative economic outlook on Zambia : I think S&P are being optimistic, the fiscal deficit is likely going to go beyond 9% between now and 2016. As they have said themselves the fiscal expansion is taking place for political reasons, as 2016 comes closer that will only worsen as the government wants to be seen to be at work. So I say 7% is overly conservative, my bet is on 9% of GDP for 2014 and beyond that it will likely go beyond 10%. I dont see the Finance Ministry slowing spending in 2015 at all. By the way Im not sure if youve seen the results of the most recent T-Bill auction. The 364 Rate is at 14.24%, I expected to see rates that high in 2014 and thought I was being overly pessimistic. I think yields of 15% in 2014 may occur. Given the fact that there is a very clear dislocation between the monetary policy rate and the treasury bill rates we will see the net income margins of the banks severely compressed. Banks typically borrow wholesale at either just below or just above the treasury bill rates (for term deposits from institutional investors) depending on the individual banks credit worthiness. Given that treasury bill rates have risen over 3% this year because of the governments demand for domestic credit, yet the monetary policy rate has only gone up 0.75%- you can see that the skew will affect smaller banks badly. All the while they are supposed to raise their capital. There is way too much risk being pushed onto the fiscus and the monetary system. If this continues we may see some banks fail. Furthermore if the countrys credit rating falls, well simply see even more domestic borrowing- which will at some point mean the government may start printing money to pay its obligations (depending on the velocity of its credit demand). Which suggests that inflationary risks may creep up. This all sounds very pessimistic...but given the way the economy is being managed its possible. Whats shocking is just how bad a job is being done given the otherwise strong macroeconomc fundamentals. This is really simply a case of poor policy making. The solution to this is as you have stated it. MWIYA MUSOKOTWANE (ZE Comment)
Posted on: Fri, 25 Oct 2013 22:02:43 +0000
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