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Local Market Commentary
- Zambia’s Markit/Stanbic Bank PMI fell back below the 50-point mark in May, coming in at 49.8 from 50.5 in the month prior, signaling a fractional deterioration in business conditions in the private sector. Survey results showed that weakness in operating conditions stemmed from renewed reductions in output and new orders, which both ticked down following slight increases in the previous month. Price rises, money shortages, and unfavorable exchange rate movements acted to limit the ability of firms to secure new orders and expand activity, with customers sometimes struggling to fund projects. In terms of prices, companies increased their charges for the fourth straight month in May. Meanwhile, rising output prices reflected the passing on of higher input costs, which increased for the eighth straight month. Overall, it appears that inflationary pressures are starting to weigh on private sector growth in Zambia.
- A study conducted by the Columbia University and the department of politics and international relations at the University of Oxford revealed that while China is Africa’s biggest bilateral creditor, most of the debt is due to private Western holders of African debt. The researchers said in the report that Chinese debt is not the most rapidly growing segment of debt. Other credit lines have grown a lot more in recent years, especially those towards commercial creditors.
- The Western segment has grown much faster than any liabilities that African states owe other creditors in the last couple of years. The report cited confidential estimates of international financial institutions that showed sub-Saharan Africa’s government debts to Chinese entities at the end of 2019 stood at around $78bn. This marked around 8% of the region’s total debt of $954bn and 18% of Africa’s external debt.
- The researchers said that around half of Africa’s public debt was domestically issued, and the other half was owed to external creditors. One-third of Africa’s external debt was owed to bilateral official partners, one-third to international financial institutions, and one-third in the form of Eurobonds denominated in a currency other than that of the issuing state. The estimates from international financial institutions showed that about half of the bilateral debt was owed to China.
- The figures broadly aligned with the World Bank’s International Debt Statistics, which show that Africa has about $427bn in external debt. The World Bank data also shows that Chinese-held debt makes up half of the bilateral debt stock. The Global Development Policy Center at Boston University and the China Africa Research Initiative at Johns Hopkins University estimate that Beijing has lent about $150bn to African countries since 2000.
- The researchers said in the report that while this is a sizeable amount, it is not enough to have been the main driver of the debt build-up in Africa over the past decade. The report also found that Chinese lending, rather than driving a continent-wide expansion of debt, was heavily concentrated in five countries, namely Angola, Ethiopia, Kenya, Nigeria, and Zambia.
- Copper was sharply up this morning as China continued to reopen while there was talk over the weekend that the United States would look at lifting some of the tariffs put in place against China during the Trump administration in order to combat high inflation.
- The benchmark 3m LME contract is currently 2% higher on the session at $9695.50/tonne and has for the most part ignored the poor China PMI data, choosing to focus on the points mentioned above.
- In the FX market, the Zambian Kwacha is expected to hold firm against the USD this week amid an increasing hard supply of currency from corporates buying the local currency to pay taxes. Note that next week companies will be preparing for PAYE tax due on Friday.
- Directional momentum is weak at the moment, stock markets are not offering much insight into whether risk appetite is on the rise or falling back, and even treasury markets have crept into some sideways rangebound trading. Technically, the USD does not favor any distinct direction, while the labour data released last week changed very little concerning what was priced in. Although some are calling for recessionary type conditions in the U.S., the current data reflect a degree of resilience, and investors find themselves in no-mans land. As a result, the EUR is trading back above 1.0700, although the GBP is under some pressure as PM Johnson’s tenure is brought into question through a possible vote of no-confidence this week.
Rand and International FX Commentary
- As we begin a new week, the world remains in varying degrees of turmoil. The war in Ukraine continues to drag on as it twists and turns, and this weekend, Russian troops started to shell Kyiv again, signifying that this war is far from over. Equity markets are back up this morning but finished last week on the back foot, highlighting uncertainty while central banks continue to push hard in their fight against inflation. But that will only go so far in taming inflation while oil prices are back above $120.00pb.
- It becomes tough to settle on a clear strategy to protect existing assets against erosion and difficulties in such uncertain times. For local asset managers, the allure of investing offshore is ever-present; however, invest where? This morning, Business Day is running with a story that asset managers are concerned about a strong outflow of funds due to the raised prudential limits announced by Fin Min Godongwana in the Fed budget. Effectively the 10% that could be invested into Africa can now be invested anywhere abroad.
- At face value, that sounds dangerous for a country like SA, which faces so many challenges. Cynics would argue that this offers a wonderful opportunity to externalize wealth and protect against the ravages of a poorly run economy. However, investing abroad assumes that the opportunities available are at least equal, if not better. Asset managers may enjoy having a larger pool of companies to expose themselves to, but valuations abroad still need to be considered. Just because one can invest abroad doesn’t mean one should, and just because limits have been raised does not guarantee that they will be used.
- This information has been in the public domain for months now, and the ZAR is still trading at levels stronger than where it started the year. The big outflows have not materialized, and for good reason. Massive quantities of QE have distorted asset prices, and clear value is not easily discernable. The deviation between the performance of equity markets and their underlying economies is enormous and cannot be explained just by company diversification strategies. Valuations are sky-high, and the fear of a major correction is palpable. How long that takes to correct is open for debate. In the interim, investors in SA are not acting as though they are fearful that such outflows will materialize any time soon, and if the ZAR Sentiment Indicator is anything to go by, there are fewer in the professional FX market that are hedging now than was the case 6 months ago. If anything, ZAR indicators allude to resilience, not weakness, so such articles need to be considered in the correct context.