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20+ Sub Saharan African countries in or at high risk of debt distress

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  • In a move to develop battery industries, Zambia and the Democratic Republic of Congo (DRC), which have around 70% of the world’s cobalt resources and large deposits of copper, have agreed to tap the resources. The countries agreed to create a common governance framework battery council whose executive committee will include the two countries’ heads of state. Under the agreement, the two sides will jointly explore minerals that are critical raw materials for battery manufacturing and give full play to their rich cobalt and lithium resources. Moreover, the industrial zones in the DRC and Zambia will be developed to support the initiative in Katanga and Copperbelt provinces, while the African Export-Import Bank will be the financing partner.
  • The industrial metals complex remains pressured as investors access the health of the global economy given the COVID-19 lockdowns in China, and the looming tightening of monetary policy in the United States. Copper the global bellwether for economic health is currently trading 2.30% down in the Asian session with the 3m LME contract now changing hands at $9544.00/tonne. 
  • The combination of the covid pandemic, spillover effects from the war in Ukraine and tightening global financial conditions have compounded fiscal pressures in Africa. Debt piles have ballooned over the past two years as government revenues fell amid the economic shock of the pandemic and as government expenditure shot through the roof. This comes against the backdrop of soaring international interest rates, which have pushed up debt servicing costs across the region.
  • The combination of increased debt and higher debt serving costs has seen the number of Sub Saharan African countries in or at high risk of debt distress increase markedly during the covid era. The Head of the Regional Studies Division in the African Department of IMF, Papa N’Diaye, said that more than 20 countries in the region are either at high risk of debt distress or already in debt distress.
  • The IMF representative said that debt burdens in the region are elevated at a time when the social and development needs are very large. Unsustainable debt could lead to debt distress, where a country is unable to fulfil its financial debt obligations and resorts to debt restructuring. N’Diaye did not list the 20+ countries by name however the recently released World Economic Outlook revealed that eight countries in the world were in debt distress, thirty at high risk and twenty four at moderate risk, and seven countries at low risk of debt distress.
  • African countries at high risk of debt distress included Burundi, Cabo Verde, Cameroon, Central African Republic, Comoros, Djibouti, Ethiopia, Gambia, Ghana, Guinea Bissau, Kenya, Malawi, Sierra Leone, and Zambia. Meanwhile, of the eight countries in debt distress globally, all but one are from Africa. These include Chad, Congo Republic, Mozambique, Somalia, South Sudan, Sudan and Zimbabwe.
  • The IMF representative said the debt service as a ratio to revenue has been increasing, adding that the debt burden is very heavy at a time when the social and development needs are very large. N’Diaye said for countries in the region, the space to deal with the impact of the war in Ukraine or any other external shock is very limited, and there will be a need to make difficult choices. As mentioned in previous commentary, with global monetary conditions tightening at a rapid pace, investors are becoming very picky over where they are willing to invest funds. Therefore, a thorough study of a country’s macroeconomic and fiscal dynamics is more important than ever.
  • Moving over to the FX markets, the USD has remained well supported through late trade on Friday and early this week. Although it lost some topside momentum, there is no definitive sell signal that has materialised. It may just be that the USD is entering another consolidation phase where investors will reassess the prospects for the USD given global growth data. There are also key central bank events this week that could impact overall central banking expectations, which could affect the value of the USD. The same consolidation of USD appreciation is also evident against both the EUR and the GBP. Both have stabilised but off a low base. The EUR is still holding around 1.05/dlr, and there is talk of targeting parity, while the GBP is doing the same, but around 1.25/dlr

Rand and International FX Commentary

  • Thinned out holiday trading exacerbated the ZAR’s move yesterday to help it reach levels approaching 16.2000 in what was a wild trading session where the ZAR also traded below 15.8000. More normalised trading activity will return today, and a truer sense of relative value will be found. Exporters found value above 16.00/dlr last week and are bound to find the same again. The caveat this week will be the upcoming central bank decisions of the BoE and Fed and what they might reveal. 
  • In both cases, the market is looking for tightening, although with the Fed, speculation revolves around whether the move will be a 25bp or a 50bp hike. US Treasury yields have been nudging higher in recent trading sessions. A 50bp rate hike is priced in and should not trouble markets much. The risk for traders long of USDs is that the Fed draws attention to growth developments internationally and turns less aggressive in its guidance. It needs to strike a balance between combating inflation while not cratering stock markets and growth expectations. The latter might assist with inflation but would be counter-productive.
  • So the week ahead holds the potential to be volatile once more. Although the ZAR might now be considered mildly undervalued, it can still swing between extremes. Levels approaching 16.2000 are now considered a technical level that might prove difficult to punch through and could contain the ZAR depreciation. The USD itself is now deemed to be overvalued against most currencies and will become progressively more vulnerable the longer it consolidates around current levels to allow investors to look through the current phase of monetary policy divergence between the US and other countries.
  • Also, the vulnerability of global stocks is not necessarily naturally supportive of the USD through promoting the USD’s safe-haven status. Should equity markets come under further pressure, the one central bank outlook that investors would need to reconsider is that of the Federal Reserve. For now, the USD remains strong and supported, but there is a lot of tightening, and the risk/reward ratio is gradually turning asymmetrically against the USD.

Nicholas Kabaso

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