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China is an integral part of Africa’s debt issues

March 21, 2022by Nicholas Kabaso
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Local Market Commentary

  • Over the weekend, Provisional liquidator at Vendanta Resources’ Konkola Copper Mines, Milingo Lungu, announced his resignation. Lungu was quoted as saying, “I’ve resigned. I think I’ve done my part, and I don’t think my prolonged stay there, especially if I have to start going to court, is going to be beneficial to the company or any of its stakeholders.” Note that Lungu faces a number of graft charges relating to his time as provisional liquidator of Konkola Copper Mines since 2019.
  • In the FX market,  the Zambian Kwacha is expected to show some stability in the coming days as suppliers of hard currency unwind their positions.
  • It is a quiet start to the week in Zambia amid a dearth of domestic data. The focus is therefore set to rest on regional and global developments. According to a study conducted by the Green Finance and Development Centre at Fudan University in Shanghai, the world’s poorest developing nations will pay China and its lenders nearly $14bn in debt servicing costs this year. Total debt costs meanwhile are expected to sit at $52.8bn for this year. The report revealed that more than a quarter of that will go to China, which is one of the largest lenders to developing nations.
  • At the end of 2020, the 68 nations included in the study owed more than $110bn to various Chinese lenders in official bilateral debt. This means that China was the second-largest lender to developing nations, following the World Bank’s International Development Association. The study showed that the repayment costs to official Chinese lenders will exceed 2% of GDP in eight of the countries included in the study. Angola was highlighted as the worst off, with the country owing nearly 5% of its GDP to China. 
  • Given that China is one of the largest creditors of highly indebted developing nations, the country has come under pressure to provide debt restructuring for several of these countries that are in a position of fiscal distress. It is worth noting that the Chinese government said in late 2020 that it had suspended servicing debt requirements on more than $2bn in debt under the global effort to help provide fiscal relief for the world’s poorest and most indebted nations. Moreover, Bloomberg reported that Chinese lenders had suspended $5.7bn in repayments as of late last year. 
  • In Africa, Zambia, Angola, and Ethiopia are some of the most indebted countries on the continent and are most in need of fiscal reprieve. Concerns over Ghana’s and Kenya’s debt sustainability have also risen sharply, and this is reflected by the increased fiscal premium priced into the sovereign bonds of these two countries. Whether we see China provide some more fiscal relief for these countries remains to be seen. Unless there is another round of fiscal relief, fiscal risks in the five countries mentioned above are expected to remain elevated. That said, it is worth noting that Angola is making some notable headway in terms of its reforms. This comes on the back of windfall oil revenues, which are helping to support the country’s fiscus.
  • Energy markets remain a focal point. Oil has rallied this morning as we kick off the new week, with the Brent front-month contract back above $110 per barrel now as the war between Russia and Ukraine intensifies. Prices have also been supported by attacks in Saudi Arabia, with Iranian-backed rebels drone-striking energy facilities to ratchet up tensions in the middle-east. With this adding to supply concerns, the volatility within the market looks set to remain entrenched for now.
  • This weekend, however, did see major oil importers increase the pressure on exporters to start producing more, with the likes of Japan urging the UAE to ramp up their production. This pressure may be starting to bear results, with Saudi Aramco stating over the weekend that it is looking at increasing spending in order to boost production. The state-owned company’s goal is to increase output to 13mn barrels per day, although this may only be completed by 2027. Nevertheless, it is a sign that they are looking at boosting their numbers, and could increase speculation of a larger output increase at the next OPEC+ meeting.
  • The JPY continued its slide on Monday, rising above ¥119/dlr as funds continued to flow out of the funding currency. It is a function of a weak inflation dynamic that will keep monetary policy ultra-accommodative. It is also an indication that carry trades are back on and that risk appetite has picked up slightly. Carry trades will be considered, and countries with higher interest rates or exposure to commodities might prove more attractive. The USD itself has picked up slightly as the USD index rises back above 98.3, while for now, the EUR and the GBP appear to be in a more consolidative mood, trading at 1.1037 and 1.3150, respectively.

Rand and International FX Commentary

  • South African financial markets are closed on account of the Human Rights Public Holiday today. 

Nicholas Kabaso

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