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Local Market Commentary
- The President and Chairman of the African Export-Import Bank yesterday reported that the lending institution had received financing requests from the continent for more than $15bn as a result of the impact of the war in Ukraine on economies and businesses. The president added that the bank should be able to support up to $16bn with partnerships and structures such as instruments used by hedge funds. To date, the bank has distributed $1.5bn. The president’s comments follow on from last week’s announcement that the lender had initiated a $4bn trade financing program for members affected by the war.
- While some significant steps have been made in terms of returning the country towards a more sustainable debt trajectory under the newly elected government, arguably the most important step, a debt restructuring programme with the International Monetary Fund, is likely to be delayed due to ongoing disputes and prolonged negotiations with some of the country’s main creditors. In a recently published report, global credit ratings agency Fitch said that the debt restructuring programme with the IMF could be postponed to 2023.
- Fitch added that the timeliness released by President Hakainde Hichilema’s government for an IMF deal on the country’s estimated $14.7bn foreign debt by June 2022 is overly optimistic, given all the niggles that need to be ironed out with the country’s creditors. Recall that reports surfaced late last week that Zambia’s single largest creditor, China, is one of the parties delaying the debt restructuring. Out of Zambia’s total external public-sector debt, commercial and state-owned Chinese lenders account for $5.5bn.
- Meanwhile, BlackRock, the world’s largest fund manager, has come under pressure to delay demands for debt interest payments from Zambia, a move aimed at preventing a deepening of the fiscal crisis in the country. BlackRock is amongst a pool of private investors that have thus far refused to reduce the interest rate or delay payments on Zambian bonds. Private creditors are amongst those yet to agree to the debt restructuring terms, which is delaying Zambia’s debt restructuring programme with the IMF. Bloomberg reported that BlackRock holds around $220mn in Zambian bonds and could generate as much as $180mn for clients if the debt were paid in full, marking a profit in excess of 100% for clients.
- Negotiations for the debt restructuring are scheduled to take place later this month, with G20 Finance Ministers set to meet on 20 April during the IMF spring meetings. Zambia is amongst three African nations that last year applied for debt relief under the common framework, which has yet to come into force, partly due to the fact that it requires private creditors to participate. Looking ahead, while the debt restructuring programme with the IMF is likely to be delayed, the broader bullish bias in Zambian bonds is expected to persist as the country continues to benefit from elevated commodity prices and the shift in fiscal policy from the new government with lawmakers already making some notable cuts to expenditure to help balance the country’s budget.
- In the FX markets, the Zambian Kwacha closed on the front foot yesterday, adding to its strong start in April. The Kwacha is the best performing African currency against the USD, tracked by Bloomberg on a month-to-date basis. The Bank of Zambia has continued to steadily offload dollars in the market, ensuring there is enough liquidity to meet current demand, thereby supporting the local currency.
- Buoyant headline inflation data yesterday and comments from Fed speakers alluding to further tightening continued to lend some support to the USD. The trade-weighted USD index was able to break through the 100 index level and has consolidated those gains this morning. Although it may lose some of that impetus as equity markets stabilise, it retains a slight safe-haven bid and continues to benefit from the monetary policy disparities between the U.S. and its major trading partners. The USD continues to trade bullishly against both the EUR and the GBP, with the former testing March’s lows and testing its more recent lows. In both cases, investors prefer the safety of the USD.
Rand and International FX Commentary
- Eskom decided to re-implement stage two load shedding, floods in KwaZulu Natal have caused untold damage, and an estimated 60 people have lost their lives. Infrastructure has been decimated, and the premier has asked the government to declare a State of Disaster in the province to allow for extraordinary assistance. Unfortunately, this means that funds will need to be diverted to KwaZulu-Natal for reconstruction purposes, which will further burden the fiscus. All this while SA’s economy struggles to reclaim the economic ground it lost due to the pandemic.
- Furthermore, parliament has disappointingly cleared former minister Zweli Mkhize of breaching the ethics code despite acknowledging that his family benefited from the Digital Vibes scandal. It pours cold water on the fight against corruption and maladministration while Jacob Zuma continues to find ways to avoid his day in court. None of this is particularly encouraging and does little to boost confidence in SA’s longer-term prospects.
- Internationally, inflation has become a theme that has permeated most economies and poses a serious risk to global growth. Central banks are raising rates and desperately trying to normalise policy. Covid remains a concern across Europe and has become a serious risk in China. And all of this comes against the geopolitical uncertainties triggered by the war in Ukraine, imposing selling pressure on stock markets which are turning vulnerable, eroding risk appetite. If ever there was a recipe for emerging market currencies to sell off, this would be it.
- And yet, the ZAR continues to power ahead and make back lost ground, with the pair trading as low as 14.4500/dlr through yesterday’s trade. It again looks set to test the prior lows seen in March and highlights how some of the drivers of the ZAR are more than a match for the bad news. Commodity prices, strong trade accounts, a positive carry trade, a liquid proxy for commodity-linked emerging markets, a conservative central bank and manageable inflation all mean that SA gets to weather the global storm better than most. In a world where relative attraction is king, this says a lot about the troubles other countries are facing and SA’s unique position to benefit from the current commodity price surge. While it may not last indefinitely, it is likely to extend for a while still, and ZAR may still impress further through the months ahead.