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Africa to be hit hard by continued halt to Ukraine’s grain exports

March 14, 2022by Nicholas Kabaso
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Local Market Commentary

  • A report from Germany’s Kiel Institute for the World Economy has warned that African countries may be hit hard by any continuing halt to Ukraine’s grain exports caused by the war. According to the institute, “the war in Ukraine could significantly worsen the supply of cereals in food production in African countries, making food more expensive if Ukraine ceases to be a grain supplier. The country supplies large quantities of grain to North African states in particular, which other sources of supply could not replace even in the long run.” Among the countries hardest hit could be Tunisia, where the country’s total wheat imports would decrease by over 15%. Egypt would import 17% less while South Africa would import 7% less. Grain imports would also be noticeably disrupted in countries such as Cameroon, Algeria, Libya, Ethiopia, Kenya, Uganda, Morocco, and Mozambique.
  • There is a decidedly cautious tone enveloping the base metal desks this morning. 3m LME copper is currently trading 1.27% down at $10054.50/tonne at the time of writing while aluminium has fallen by just over 0.57% on the day currently changing hands at $3473.00/tonne. All eyes remain on the Ukrainian crisis and the impact on supply chains for metals more broadly, we do not expect this to change in the near term.
  • In other news, Reuters reported the following – Benchmark steel prices in China hit two-week lows on Monday, as surging COVID-19 infections in the world’s biggest steel producer and metals consumer fanned worries over the country’s economic growth prospects. Fears of potentially wider and tougher restrictions also weighed on prices of steelmaking ingredients such as iron ore and coking coal.
  • In the local FX market, the Zambian Kwacha is expected to weaken further this week as demand for hard currency outweighs supply.
  • Moving over to the US, this week, much of the focus will rest on the ongoing war in Ukraine and the Fed’s response to that. Fed Chairman Powell had previously characterised the war as a game-changer, and expectations for rate hikes reversed spectacularly in the past two weeks. Whereas before, the Fed was expected to hike by as much as 50bp, those expectations have reversed down to just 25bp, with investors likely to monitor the dot plots and guidance offered carefully. It may allude to a much flatter rate hike trajectory than first anticipated.
  • This week, the USD starts on the front foot ahead of the FOMC decision, where a 25bp rate hike is anticipated. Furthermore, it benefits from the geopolitical tensions that persist and the recent sell-off in risk markets that spurred on a rotation back towards safe-havens. The USD will likely remain well supported through the week ahead, although reports of more constructive negotiations between Ukraine and Russia will be interesting.

Rand and International FX Commentary

  • If it’s not geopolitical uncertainties, then it’s a fresh wave of Covid out of China causing disruptions or it’s the threat of inflation that pre-existed the War on Ukraine. In short, there is enough for investors to concern themselves with. The real question is whether investors need to start preparing for the emergence of a bear market in equities or whether this will simply be a passing phase that will blow itself off. Stated differently, could equity and commodity prices be distorted higher in a manner that would bolster risk appetite and the performance of EM currencies? At face value, this time is a little different.
  • Asset prices already staged an impressive rally straight through the middle of the pandemic when economic growth had barely shown signs of recovering. Equity market/GDP ratios rose further to highlight the value deviation from the underlying economy. Furthermore, central banks are looking to tighten and normalise monetary policies, while fiscal authorities are also looking to rein in their excessive spending. If not for the war that saw central banks turn less hawkish, investors would’ve moved to price in a lot more of this than they have.
  • Supply chain and logistical bottlenecks have not yet disappeared, and the world is not entirely over the Covid pandemic, with China’s zero-Covid policy coming back to bite them as they now experience a wave that they are locking down against. Were China not such a significant producer and a driver of global growth, this might not be a big problem. However, the global economy remains fragile.
  • So it is a tricky time. On the one hand, there are many reasons to turn bearish. On the other, to do so wholesale, one would have to accept that central banks will act differently this time and not prevent stock markets from selling off. Could that be realistic when so many risks threaten to derail the economic outlook? The answer will guide how emerging market currencies will perform. For now, the ZAR will remain resilient and will continue to focus on developments in Ukraine. Although the war continues, there are indications that Presidents of Ukraine and Russia could meet soon to negotiate an end to this war.

Nicholas Kabaso

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