- The big development in the African fiscal space overnight was that global ratings agency Fitch upgraded Zambia’s long-term local currency cred-it issuer default rating to CCC from CC and has affirmed Zambia’s long-term foreign-currency issuer default rating at RD. Fitch said in the state-ment accompanying the rating decision that the upgrade of the long-term local currency credit issuer default rating to CCC reflects that the government has continued to service its local currency debt and has made no indication that it plans to include domestic debt in any potential debt restructuring.
- The global credit rating agency said that that this means an eventual restructuring of external debt could improve the overall public finance position and support local-currency debt sustainability. That said, it is important to note that the CCC rating still reflects a real possibility of a lo-cal currency default, given Zambia’s weak public finances and tight domestic financing conditions. Fitch noted in its statement that Zambia’s budget deficit widened to 12% of GDP in 2020 and forecasts a 2021 deficit of 10.3%. Zambia’s debt pile meanwhile swelled to an unprecedent-ed 114% of GDP at the end of last year, which compares to the current B median of 66%.
- On a more sobering note, Fitch said that Zambia’s long-term foreign-currency issuer default rating of RD reflects that the government has not serviced its outstanding Eurobonds pending a restructuring since its failure to pay a coupon on its $1bn 2024 Eurobond, which was due on 14 October 2020. While the government has defaulted on its Eurobond coupon payment, the Zambian government has continued to service for-eign currency-denominated debt to multilateral financial institutions and debt on a few priority projects that have an immediate social and economic impact.
- Going forward, while the Zambian government has made some positive strides towards securing a deal with the IMF and has shown signs that it willing to implement structural reforms, fiscal risks in Zambia remain tilted firmly to the upside. In its statement, Fitch said that the following three factors could lead to negative rating action:
- If the government announces clear plans to restructure its kwacha-denominated debt.
2. If the government enters a grace period on its local currency debt.
3. The rating would be downgraded if the government defaults on the local currency debt before any re-structuring announcement.
- All eyes were focused on the Chinese trade numbers this morning. Exports grew at a robust pace in March soaring some 30.6% in USD terms year on year but slower than the 159% rise in February. On the import side, we had an increase of some 38.1% year on year versus a market forecast of 23.3% resulting in a trade surplus of $13.8bn.
- Copper imports rose by 25% year on year the customs data showed, this despite disruptions from the top copper producer Chile. The data showed that China imported unwrought copper and products totalling 552,317 tonnes last month. Reuters reported that Copper imports in the first quarter totalled 1.44 million tonnes, up 11.9% year-on-year. That is the highest first-quarter amount since at least 2008, according to the vendors data.
- Stateside, a NY Fed survey has found that median inflation expectations for 1 & 3yr horizons increased in March to 3.2% and 3.1% respectively, while the mean expectation that US unemployment will be higher in one years’ time dropped a little further to 34.4% from 39.1% in Feb. The outlook is steadily improving and confidence levels are growing. Depending on whether the inflation outlook allows, the Fed will keep mone-tary policy as accommodative as possible, for as long as it can and will rather risk overheating the economy than doing too much.
- Central to how the Fed will implement monetary policy is the outlook for CPI. CPI growth in the US rose in line with expectations from 1.4% y/y to 1.7% y/y in February, suggesting inflationary pressures in the US remained relatively subdued in the early stages of the year. However, ex-pectations are for CPI growth to have continued its uptrend in March, with respondents surveyed by Bloomberg pencilling in a 2.5% y/y rate as their consensus expectation. Inflationary pressures will likely remain a function of transitory factors such as higher energy prices in the near term, while the effect of recent fiscal stimulus may also begin to show in the data. While a topside surprise in the data could reignite the rise in US Treasury yields that caused havoc in global markets through Q1, the Fed will stick to its dovish line that any near-term inflationary pressures are expected to be temporary.
- In the FX markets, a broader bearish bias remains entrenched on the Kwacha at present with the local unit continuing to hit fresh lows. Meanwhile, ahead of the US inflation data later today, the USD has risen modestly off its recent low. The risk is that the data beats expecta-tions to the topside and forces an adjustment in inflation expectations such that US bond yields rise a little further and bolster the perfor-mance of the USD. Technically, the USD is due a modest recovery, although the weekly chart shows that any near-term jump in the USD will likely be short-lived, and that there is a more than even chance that the USD will retreat still further. Also a feature that will influence the per-formance of the USD will be the strength of the earnings reports, as more companies report back on their performance through a very difficult time and offer guidance on future performance.
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