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Debt restructuring talks to be the focus

April 22, 2022by Nicholas Kabaso
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Local Market Commentary

  • Finance Minister Situmbeko Musokotwane said in a webinar on Thursday that the government has done that it needs to start restructuring talks over its more than $17bn of external debt. The Finance Minister said that creditors now need to participate. Zambia is using the G20’s Common Framework, a program introduced in 2020 to provide debt relief for heavily indebted countries, to restructure unsustainable debts. Zambia was one of the first countries to adopt the Common Framework, which has up until now been fruitless. Finance Minister Musokotwane said, “we’ve come here to complain and also to discuss with the leaders of the G-20, with the leaders of the Common Framework: You made a commitment, we also made a commitment,” adding “we have lived up to our part of the commitment in terms of implementing those things we agreed we’d do.” Zambia’s slow progress in restructuring its external debt, of which China and Chinese lenders account for around one-third, is one of the main factors holding up a $1.4bn bailout program with the International Monetary Fund.
  • Recall that the IMF program has already been approved at a staff level and now requires the commitment of privates creditors. From a financial market perspective, investors are banking on the country securing a deal with the IMF. Should the government fail to secure a deal over the next 6-9 months, it will likely result in a notable sell-off in domestic assets. Our base case view is that the government will secure a deal with the IMF before year-end.
  • Moving over to base metals, The 3m LME copper benchmark is still well within the trading range of $10100/tonne and $10600/tonne in place since the middle of March however it is on track to record a weekly fall driven primarily by rising inventories and concerns surrounding Chinese demand given the COVID-19 lockdowns.
  • Inventories at LME registered warehouses rose by 2500 tonnes to 130 500 by the close of business yesterday which is the highest level since October 2021.
  • On the news front, African Business reported – African metals and minerals set to shine at Mining Indaba 2022. The annual mining investment conference taking place from 9-12 May in Cape Town sees record registration as African heads of state gear up to court investment into the pandemic-hit mining sector.
  • The first Investing in African Mining Indaba conference to take place in person in two years will be an opportunity for African countries to lure investment into the sector that has remained resilient during Covid-19 amid strong demand for mining commodities. Headlining the event will be heads of state from Zambia, Botswana, Zimbabwe and South Africa pitching opportunities in the continent’s rich precious metals and minerals seams. President Hakainde Hichilema, who has wasted no time in targeting reforms and clamping down on corruption since taking office in August, is expected to make a “big announcement” in the run-up to the event. In a keynote speech on Day 1 of the conference, dubbed “A New Dawn for Zambia’s Mining Sector”, he is expected to highlight the country’s huge mining potential as it moves away from his predecessor Edgar Lungu’s legacy of aggressive resource nationalism, says one of the conference organizer’s Tom Quinn.
  • Moving over to the FX markets we have the kwacha drifting marginally weaker into the final day of trade for the week. 17.4250 has been the pivot for the week however we expect the open in the interbank market to be closer to 17.4750 today.

Rand and International FX Commentary

  • It was all about the rand from a regional perspective yesterday. The ZAR has lost around 5.0% over the past three sessions and is currently trading above the 15.40 mark, its weakest level in more than a month. While at first glance, there appear to be no key drivers behind the sell-off in the ZAR, with the USD under pressure, providing a tailwind for the broader emerging market currency basket, there are a number of underlying factors that are contributing to the recent bout of ZAR weakness. 
  • Firstly, Barclays has sold half of its stake in ABSA, a sale of more than R10bn. These funds are likely being expatriated into hard currency taking advantage of the ZAR’s recent overvaluation on a real-effective trade weighted basis. Gold is also weaker, which will be compounding pressure on the ZAR, as we are a net exporter of gold. The announcements of load shedding and the backlog of exports at the Durban Port due to the severe storms in KZN are adding further pressure to the rand to leave it on the defensive heading into the weekend.
  • It is also fair to say that the latest bout of ZAR weakness is too short and sharp to be sustained. The move is likely the result of outflows related to the sale of the Barclays stake in ABSA and they will pass. If so, this is nothing to be overly concerned about and carry trade investors would not want to trade too bearishly on such information given the backdrop of high interest rates, the commodity link and the inflation differential that remains in the ZAR’s favour. Although one could argue that this latest move in the ZAR is long overdue, readers would do well to monitor whether the tailwinds that have helped the ZAR to recover since the start of Dec 2021 as they remain intact.
  • Finally, after such a brutal sell-off, many stale short USD positions have now been cleared out. Although investors will be wary of re-establishing short positions given the volatility, some stability is expected to return. However, technical analysis reveals that levels closer to 15.50 might be tested before that unfolds and so investors are advised to proceed cautiously

Nicholas Kabaso

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