Governors Third Quarter Media Brief 2008

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Bank of Zambia

THIRD QUARTER 2008 MEDIA BRIEFING

BY

DR CALEB M. FUNDANGA

Governor

BANK OF ZAMBIA

Presented at the Bank of Zambia

19th

November, 2008


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INTRODUCTION

This brief reviews monetary policy

outcomes; and

Other economic and financial sectordevelopments in Q3 2008.

In conclusion, an inflation outlook for Q4

2008 is provided.

Bank of Zambia


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2.0 INFLATION

Annual inflation rose to 14.2% in September then further to15.2% in October due to: Rise in domestic fuel prices, transport costs and pass-through effects of

Kwacha exchange rate depreciation.

Low supply of grains, cereals and high production costs of processed fooditems.

Bank of Zambia

Chart 1 : Annual Inflation Dec 04- Oct 08

-113579

11131517192123

Dec04

Mar05 J

un

Sept

Dec05

Mar06 J

un

Sep

Dec06

Mar07

Jun07 S

ep

Dec07

Mar08

Jun08

Sept08

Oct08

(%)

Overall Food Non-food


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3.0 MONEY SUPPLY & DOMESTIC

CREDIT

Money supply growth slowed down to 17.3%(26.7%, end-June 2008) due to lower growth in netforeign assets.

Annual growth in total domestic credit slowed downto 19.5% (28.3%, June 2008).

Personal loans continued to account for highest shareat 28.7% (29.4%, Q2) followed by agriculture at17.7% (15.7%, Q2)

Bank of Zambia


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4.0 INTEREST RATES

Yield Rates On Government Securities

Weighted average yield rate on Treasury bills increased to14.0% in September 2008 (13.5% in June 2008).

Weighted average yield rate on bonds declined to 15.3%(15.7% in June 2008).

Commercial Bank Interest Rates

Average lending rate rose to 25.7% (24.6% in June 2008).

30-day deposit rate for over K20 million and averagesavings rate for amounts above K100,000 remainedunchanged at 5.0% and 4.8%, respectively.

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5.0 FOREIGN EXCHANGE MARKET

High volatility and weakening of Kwacha due to:

Political uncertainty; Global financial crisis; and Fall in copper prices.

Kwacha depreciated against US dollar by 8.8% (appreciation o11.5% in June 2008) but appreciated against pound sterling by0.7% (appreciated by 12.9% in June 2008).

BoZ participated in forex market, recording net sales of US $56.5million in Q3 (net purchases of US $16.5 million in Q2).

BankofZambia


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Foreign Exchange Market (cont)Bank of Zambia

Chart 2: Interbank Exchange Rates (Kwacha per Currency)

3,000.00

3,500.00

4,000.00

4,500.00

5,000.00

5,500.00

6,000.00

6,500.00

7,000.00

7,500.00

8,000.00

8,500.00

9,000.00

9,500.00

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

US$.Pound,

Euro

425.00

445.00

465.00

485.00

505.00

525.00

545.00

565.00

585.00

605.00

Rand

USD Pound Euro SA Rand


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6.0 BALANCE OF PAYMENTS (BoP)

Overall BoP position-deficit of US $120.6 million in Q3(surplus of US $146.1 million in Q2).Due to decline in current account mainly following lower export earnings

which fell by 27.9% in Q3 (8.6% increase, Q2).

Table 2 :Trade Data in US $ millions (f.o.b), Q3 2007-Q3 2008

Bank of

Zambia

Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

Trade Bal 349.7 97.2 425.9 231.7 -224.8

Exports 1,318.7 1,132.8 1,323.4 1,437.7 1,037.3

Metals 1,094.8 937.5 1,147.2 1,214.3 807.6

Copper 1,027.9 858.4 1,035.5 1,124.2 758.1

Cobalt 66.9 79.1 111.7 90.1 49.5

Non-Metals 223.9 195.2 176.3 223.4 229.7

Imports -988.0 -1,055.5 -913.2 -1225.9 -1284.4


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IMF mission in Zambia, 17th - 26th September 2008: Reviewed economic performance under PRGF arrangement

for period up to June 2008.

All end-June 2008 benchmarks observed. Broad agreement on macroeconomic outlook for 2008.

o Mission satisfied with performance of Zambian economy.

o Expect slow down in economic growth this year due torelatively poor harvest and inadequate power supply.

Follow up mission in December 2008.

7.0 IMPLEMENTATION OF THE

ECONOMIC PROGRAMME

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Overall financial condition and performance ofbanking sector satisfactory in Q3.

Banks had adequate capital reserves, asset quality, earnings andliquidity remained satisfactory.

Overall financial condition and performance of NBFIsalso satisfactory.

Leasing and finance companies, MFIs and bureaux de change-adequate regulatory capital.

Earnings, asset quality and liquidity positions fair.

8.0 DEVELOPMENTS IN

FINANCIAL SECTORBank of Zambia


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9.0 IMPLICATIONS OF GLOBAL

FINANCIAL CRISIS ON ZAMBIA

Causes of Credit Crunch: Poor underwriting standards for mortgage loans;

Weak regulation and supervision of banking sector; and

Many international banks had exposure to the sub-prime security backed financialassets;

Signs of Problem: Sub-prime lenders unable to service debt when interest rates rose, early 2007. High loan defaults, foreclosures, and decline in demand for homes.

Implications on World Economies:

Banking system short of liquidity, failing to lend to each other and not able to provide

credit to private sector players; Businesses scaling down operations and closures, reduced employment, default on

financial obligations; and Slow down in economic growth of USA and countries concerned.

Bank of

Zambia


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Implications of Global Financial Crisis on

Zambia cont.

Lessons for the banking sector in Zambia:

Need for banks to adhere to strict underwriting procedures formortgage and personal loans

Urgent need for banks to fully utilise the services of the CreditReference Bureau

Commercial banks urged to share information with BoZ on atimely basis

BoZ to enhance supervision of banks in line with the Risk

Based Supervision approach


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Implications of Global Financial Crisis on

Zambia cont.

Investor Confidence:To-date FDI continues to rise in Zambia;

Banking system stable and adequately capitalised

No liquidity problems;Higher vigilance of supervisory oversight;

Strong economic fundamentals; and

Co-operating partners disbursing financial support.

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Inflationary pressures may arise from: Pass through effects of depreciation of the Kwacha against the US

dollar; Lower seasonal supply of fresh vegetables, maize, cereals and

tubers, typical during last quarter of year; and

Increase in Government expenditure arising mainly frompresidential elections and higher subsidy on FSP.

BoZ to undertake appropriate monetary policyactions to contain inflationary pressures.

Thank You

10.0 INFLATION OUTLOOK FOR

FOURTH QUARTER 2008Bank of Zambia

Documents

Governors Third Quarter Media Brief 2008