1 MONETARY POLICY COMMITTEE STATEMENT FOR THIRD QUARTER 2016 Governor s Presentation to the Media 16 th November, 2016
INTRODUCTION 2 This presentation is structured as follows: 1. Decision of the Monetary Policy Committee 2. Overview 3. Global economic developments 4. Domestic economic developments 5. Macroeconomic outlook
MONETARY POLICY DECISION MPC decided to maintain the Policy Rate at 15.5%. In addition, the Committee decided the following: remove restrictions on banks access to the Overnight Lending Facility (OLF); allow the banks automatic conversion of intra-day credit to overnight loans on the OLF; and, extend the banks compliance to statutory reserve requirements from daily to the weekly average. 3
MONETARY POLICY DECISION The Committee took into account the following factors in its decisions: continued decline in inflation in 2016, with inflation expected to fall to single digits by end-2016; projected decline in inflation into the target range of 6 8% in the medium-term; short-term risks to inflation, which are expected to arise from policy measures relating to the 2017 Budget; proposed measures in the 2017 Budget offer the prospects of promoting fiscal consolidation, and support macroeconomic stability over the medium-term; persistent risks to economic growth and trend rise in nonperforming loans; 4
MONETARY POLICY DECISION lending rates remain at elevated levels, putting a strain on credit expansion and economic growth; 5 need to reduce banks funding costs given the source of risks to inflation in the short-term, monetary policy is best placed accommodating the first round effects and subsequently managing the second round effects.
31-Dec-13 28-Feb-14 30-Apr-14 30-Jun-14 31-Aug-14 31-Oct-14 31-Dec-14 28-Feb-15 30-Apr-15 30-Jun-15 31-Aug-15 31-Oct-15 31-Dec-15 29-Feb-16 30-Apr-16 30-Jun-16 31-Aug-16 31-Oct-16 (%) Excess Reserves K bln OVERVIEW From the perspective of monetary policy operations, liquidity conditions have been easing somewhat since May, as reflected in the decline in the interbank rate into the Policy Rate corridor. 6 30 3 25 2.5 20 2 1.5 15 10 1 0.5 5 0 Excess Reserves BOZ Policy Rate Interbank Rate Upper-Bound OLF Rate Lower Bound
OVERVIEW 7 The Kwacha appreciated in Q3, driven by improved supply of foreign exchange.
Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Percent OVERVIEW 8 Annual inflation decline to 18.9% at end-q3, 2.1 percentage points lower than the end-q2 outturn of 21.0%; In October, inflation declined further to 12.5% while year-to-date inflation was 4.9%. 25.0 20.0 15.0 10.0 5.0 0.0 Annual Inflation Year-to-date Inflation
GLOBAL ECONOMIC DEVELOPMENTS Global economic growth continued to be sluggish in Q3 2016 as downside risks persisted. In October, the IMF s WEO projected global growth projected to slowdown to 3.1% in 2016 from 3.2% in 2015, mainly due to; China s refocusing of the economy towards domestic consumption tight fiscal policy low investment elevated debt levels uncertainty of economic recovery in the Euro area and emerging markets. 9 However, some global commodity prices rose (Table 1).
GLOBAL ECONOMIC DEVELOPMENTS 10 Table 1: Commodity Prices 2016 Q2 2016 Q3 Copper Price (US$/ton) 4,726.0 4,778.0 Oil Price (Dubai) (US$/barrel) 42.9 43.4 Wheat (US$/ton) 189.9 161.1 Maize Price (US$/ton) 171.1 153.4 Cotton (US$/kg) 1.57 1.76 Sugar (US$/kg) 0.38 0.45 Soya beans (US$/ton) 424.0 417.0 Crude oil prices increased due to the brighter outlook for economic growth in emerging market economies; Copper prices increased due to strong demand from China s construction sector; Agricultural prices had mixed performance
GLOBAL ECONOMIC DEVELOPMENTS A modest pick-up in global growth expected in 2017 premised on; Stronger performance in emerging and developing economies Continued accommodative monetary policies in advanced economies Recovery in commodity prices 11
GLOBAL ECONOMIC DEVELOPMENTS 12 10 9 8 7 6 5 4 3 2 1 0 Figure 1: Actual and Projected growth in selected countries 2011 2012 2013 2014 2015 2016f 2017f 2018f 3.5 3 2.5 2 1.5 1 0.5 0-0.5-1 -1.5 US UK China DRC EU (RHS) SA (RHS)
DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations 13 Monetary policy operations continued to focus on reducing inflationary pressures and maintaining relative stability in the exchange rate; liquidity conditions continued to easy in Q3 as reflected in the rise in the banks aggregate current account balance to K1.4 billion from K0.8 billion at end-q2; with a further easing of liquidity conditions, the interbank rate trended downwards to 16.6% at end-september from 17.6% at end- June 2016; to curb the build up of excess liquidity in the market, the Bank conducted liquidity withdrawing operations, resulting in an increase in OMO exposure to K34 billion from K25 billion (chart 1).
DOMESTIC ECONOMIC DEVELOPMENTS Monetary Policy Operations 14 Figure 2: OMO Exposure
DOMESTIC ECONOMIC DEVELOPMENTS Money Market Interbank trading declined by 35.0% to K17.2 billion in Q3, driven by improved liquidity conditions. 15 Figure 3: Interbank Trading Activity in K billions
DOMESTIC ECONOMIC DEVELOPMENTS Government securities market 16 Demand for Government securities continued to improve in Q3, mainly due to: Figure 4: Government Securities Auctions easing conditions; liquidity strong participation by local institutional investors; and relative stability in the foreign exchange market.
DOMESTIC ECONOMIC DEVELOPMENTS Government securities market 17 Consequently, the total outstanding stock of Government securities increased by 3.4% to K25.3 billion Figure 5: Outstanding Government Securities (K bln)
DOMESTIC ECONOMIC DEVELOPMENTS Government securities market 18 The holdings of Government securities by non-resident investors increased by 59.0% to K2.9 billion Figure 6: Non-resident Holdings of Government Securities
DOMESTIC ECONOMIC DEVELOPMENTS Government securities market 19 Yield rates on Government securities declined in response to improved participation on auctions (Figure 7). The weighted average Treasury bill yield rate decline to 23.7% in Q3 from 24.4% in Q2; The weighted average Government bond yield rate also declined to 25.2% from 27.1% over the same period.
DOMESTIC ECONOMIC DEVELOPMENTS Government securities market 20 Figure 7: Government securities yield rates 30.00 25.00 20.00 15.00 10.00 5.00 Average Composite Rate T-bills Average Composite rate Bonds
Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Percent DOMESTIC ECONOMIC DEVELOPMENTS Banks Nominal Interest Rates 21 Banks nominal rates rose: 30 Figure 8: Banks Nominal Interest Rates Funding costs ranged from 20.5%-40.0% (24.0%-38%, Q2); 25 20 Lending rates: 9.0%- 40.0% (8.0%-56.5%, Q2); 15 10 5 Average lending rate was 28.9%(28.0%, Q2) 0 Lending Rate Policy Rate Interbank Rate 180-day deposit rate OLF rate
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit 22 Money supply grew marginally by 0.2% in Q3 compared to a growth of 4.9% in Q2, mainly due to lending to Government. On a year-on-year basis, money supply contracted by 5% in Q3 compared to a growth rate of 19.7% in Q2. 50 45 40 35 30 25 20 15 10 5 0 Figure 9: Money Supply 45 40 35 30 25 20 15 10 5 0-5 -10 M3 (K billion) LHS M3 Growth (Q/Q, %) RHS M3 Growth (Y/Y, %) RHS
DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit Total credit grew by 4.7% in Q3, up from 0.7% in Q2 (Table 2). Excluding Government, credit contracted by 1.7% following a 3.7% contraction in Q2; Credit to private enterprises declined by 1.3%, lower than a contraction of 5.2% in Q2. Possible reasons for contraction in credit growth to the private sector include: weak economic conditions high funding cost high lending rates low risk appetite by banks 23
DOMESTIC ECONOMIC DEVELOPMENTS Money supply and credit Total Credit (Incl. Govt) Q4 2015 Q1 2016 Q2 2016 Q3 2016-5.3-3.8 0.7 4.9 Total -(Excl. Govt) -1.7 1.1-3.7-1.7 Public Enterprises -12.1-11.0-0.3-3.1 Government 3.3-11.8 9.0 15.7 Private Enterprises 24 Table 2: Credit growth -0.2 3.6-5.2-1.3 Households 5.7-2.4-2.1-0.9 NBFIs 3.7-1.8 10.3-0.1
DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market 25 The Kwacha appreciated in Q3, largely driven by improved net supply of foreign exchange (Figure 10). Figure 9: Exchange rate developments However, supply of foreign exchange by mines declined in Q3 relative to Q2 (Figure 11)
DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market 26 Figure 10: Foreign Exchange Supply
DOMESTIC ECONOMIC DEVELOPMENTS Foreign Exchange Market 27 Figure 11: Supply and demand (US$ 000)
DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity 28 In Q3, copper, cement and selected manufactured output increased: copper production rose 12.0% to 201,405 mainly due to ramped up production at some mines (Figure 12); output of food and beverages, fabricated metals, rubber and wood products increased as electricity supply improved (Figure 13).
2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity 29 Figure 12: Mining Sector Output 300,000 35,000 250,000 30,000 25,000 200,000 20,000 150,000 15,000 100,000 10,000 50,000 5,000 0 - Figure 13: Production Selected products 80 120 60 100 40 80 60 20 40 0 20-20 0-40 -20-40 -60-60 -80-80 Soft Drinks Fresh Milk Copper (MT) Gemstones (KG) Clear beer Opaque beer Mineral Water
DOMESTIC ECONOMIC DEVELOPMENTS Real Sector Activity consumer spending declined by 6.0% compared to a growth of 2.4% in Q2 due to tight credit conditions to households and low Government spending Figure 14: Consumer spending 1,200 1,000 800 600 400 200 30 60 50 40 30 20 10 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2012 2013 2014 2015 2016 Nominal Retail Sales (K'Mn) Real Sales (K'm) YoY Real Growth (%) -10
DOMESTIC ECONOMIC DEVELOPMENTS External Sector 31 Current account deficit widened to US$107.2 million from US$81.6 million, mainly due to Eurobond interest payment Figure 15: Current account balance
DOMESTIC ECONOMIC DEVELOPMENTS Fiscal performance Government spending remained lower than projected as revenue collections continued to be lower than budgeted. 32 Table 3: Fiscal performance Q3 2016 Proj Q3 2016 Prel Revenue and grants 10.6 8.3 Domestic revenue 10.5 8.2 Grants 0.1 0.1 Expenditure 12.1 10.8 of which: PEs 5.2 4.2 Goods and services 1.5 1.0 Capital expenditure 2.0 0.5 Non-financial assets 1.7 0.5 Financial assets 0.3 0.0 Change in balance 0.0 0.1 Fiscal balance -1.5-2.5 Net domestic Financing 0.8 3.1 Net external Financing 0.7-0.6
DOMESTIC ECONOMIC DEVELOPMENTS Inflation 33 inflation declined to an average of 19.6% in Q3 from 21.3% in Q2 2016. at end-q3, inflation was 18.9%, 2.1 percentage points lower than the end-q2 outturn of 21.0% (Figure 16); food inflation decelerated to 24.1% from 25.9% in Q2 while non-food inflation declined to 14.7% from 16.2%. In October, inflation declined sharply to 12.5%, largely reflecting base effects (Figure 17) and the appreciation of the Kwacha against the US dollar.
Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Percent DOMESTIC ECONOMIC DEVELOPMENTS Inflation 34 Figure 16: Annual Inflation 30 25 20 15 10 5 Overall Inflation Food inflation Non-food inflation Source: Zambia Institute for Policy Analysis and Research
January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October 200.00 180.00 DOMESTIC ECONOMIC DEVELOPMENTS Inflation 35 Figure 17: Base Effect Higher CPI 185.16 160.00 164.65 140.00 120.00 100.00 144.00 Lower CPI HIGH KWACHA DEPRECIATION 80.00 2014 2015 2016 Source: Zambia Institute for Policy Analysis and Research
DOMESTIC ECONOMIC DEVELOPMENTS Inflation 36 month-on-month inflation decelerated further to 0.1% in September 2016 from 0.3% in June 2016; in October, month-onmonth inflation rose to 0.5% (Figure 18). On a year-to-date basis, inflation was at 4.9% in October, firmly within single digit levels.
Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Percent DOMESTIC ECONOMIC DEVELOPMENTS Inflation 8.0 7.0 6.0 5.0 37 Figure 18: Monthly Inflation 4.0 3.0 2.0 1.0 - (1.0) Overall Food Non-food
MACROECONOMIC OUTLOOK GDP growth GDP growth projected at 3.0% in 2016, 3.5 in 2017 and 4.0% in 2018 38 Figure 19: GDP Growth
Factors constraining growth, particularly in 2016 include: weak copper prices MACROECONOMIC OUTLOOK GDP growth high production costs (i.e. high lending rates and effects of power rationing) fiscal pressures and attendant inflationary pressures 39 Recovery in the mining and agriculture, accommodation and food services, and continued growth in the manufacturing, transport, communications and construction sectors will underpin growth in 2016.
Over the medium-term, growth is expected to strengthen, driven by: agriculture mining recovery in energy and construction manufacturing MACROECONOMIC OUTLOOK GDP growth accommodation and food services (tourism) 40
MACROECONOMIC OUTLOOK Inflation 41 Inflation is projected to decline further over the next 18 months, consistent with the targets of 9% in 2017 and 6-8% over the medium term.
42 thank you, God bless