Zambia's currency boosted after 'prayer' but risks still linger

Life in extreme conditions, flower growing from nothing
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Who says there's no such thing as miracles from Heaven?

Six months ago, Zambia appealed to a higher power to intervene in lifting its flailing currency, the kwacha. Now, the unit has seen a head-spinning reversal of its fortunes, becoming one of the world's best performing currencies. Over the last six weeks, the kwacha has become the top performing frontier currency, soaring by nearly 23 percent, according to data from Rhombus Advisors, an emerging markets advisory firm.

Whether divine intervention is the proximate cause, the kwacha's recovery has surprised some of even the most jaded observers of the fast-moving foreign exchange market, which sees $5.3 trillion in average daily turnover.

"The currency has performed quite well this year, benefiting from some recovery in the copper price this year as well as exporters liquidating FX as the currency strengthened positively," said Brian Mugabe, a Johannesburg-based analyst with Momentum SP Reid Securities.

So did a national day of prayer in Zambia, whose official religion is Christianity, help rescue its currency? Not necessarily. According to some analysts, the booming kwacha owes its turnaround to something decidedly less supernatural: central bank intervention.

Amid a fight with inflation and slumping commodity market weighing on sentiment, Zambia's central bank began an aggressive rate hike campaign back in November.

Omotunde Mahoney, an analyst at Rhombus, told CNBC the Bank of Zambia's currency purchases were done with an eye toward creating a "superficially bullish context" for the country's investment forum, which began this week. He is one of several analysts who caution that, based on fundamentals, the currency's rally is likely unsustainable.

"Rather than reflecting any substantive improvement in Zambia's credit fundamentals, the currency's performance is probably attributable to a series of technical events," he said. These include investors scaling back on bets against the kwacha ahead of last week's International Monetary Fund meeting, and a local shortage of the currency.

One of a number of struggling sub-Saharan economies reeling from a drop in global commodities, Zambia has seen swings in its currency over the past year. Just this week, Moody's Investor Service meted out another credit downgrade to on the mining-reliant country, citing deterioration in its public finances.

water and copper

Copper, Zambia's bread and butter, has tumbled globally as demand has fallen — mainly in China — and taken the country's economy along for the ride. As Africa's second-biggest producer country of copper, it is the most important commodity and represents over 70 percent of their exports.

All that means Zambia's outlook remains fraught with risk despite the currency's revival. Though copper prices have rebounded this year, power supplies and a lack of water are affecting the mining sector, analysts say. Meanwhile, the base metal isn't totally out of the woods.

"Both the copper miners and the economy need a steady supply of power to thrive and this is just not available at the moment," said Oyin Anubi, sub-Saharan Africa economist with Bank of America Merrill Lynch.

Drought-like conditions in the country are coming to an end, but inflation remains high, he said. Last month, the government reported prices increased 22.2 percent — a staggering rate of appreciation that was in fact the first time in seven months that Zambia's inflation rate increase was lower than the previous month.

Elsewhere, investors are still wary based on Zambia's ongoing dance with the IMF. The government has announced that it intends to take a financial bailout this year, but that money may not come until December.

However, the IMF has made it clear that no monetary aid will be forthcoming until later in year after scheduled presidential elections.

"Our view is that this cannot happen until after the August elections, given the likely political damage from implementing the fiscal tightening that is needed ahead of the vote," said Bank of America's Anubi.

"As soon as a program is confirmed this will improve sentiment towards all Zambia assets, including the kwacha," she added.