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Has the G20 debt relief provided the intended fiscal relief for low-income countries?

March 1, 2022by Nicholas Kabaso
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Local Market Commentary

  • Yesterday, the Energy Regulation Board announced that the price of diesel in Zambia had increased to ZMW 21.54 per litre from ZMW 18.93 while Kerosene was unchanged at ZMW 15.39 per litre. All these changes take effect from midnight Tuesday. Note that increasing fuel prices are one of the upside risks to the inflation outlook.
  • In response to the devastating impact of the Covid-19 pandemic on low-income and highly indebted countries, the G20 launched a debt restructuring program in late 2020 to help seventy potential defaulting countries known as the Common Framework. However, multiple reports suggest that these developing countries are yet to see the benefits of the debt relief program.
  • Recall that under the G20’s Common Framework, participating countries were set to agree to restructure their debt with bilateral lenders and the International Monetary Fund. In addition to this, the participating nations were supposed to seek similar debt treatment from private-sector creditors. However, the only three countries to do this were Chad, Zambia and Ethiopia and not one of the three countries has yet received any debt relief.
  • G20 finance ministers and central bank governors who met last month to discuss IMF and World Bank proposals for immediate debt service suspension for countries seeking debt restructuring ended without a solution to the debt crisis. Bloomberg reported that one of the main hindrances was that China did not want outright cuts on debt. This has prompted the US and multilateral groups to blame China for the lack of progress in the G20’s Common Framework.
  • With the private sector, for the most part, refusing to partake in the debt relief program and China slowing down the process, the G20’s debt relief challenges are unlikely to be resolved anytime soon. As such, given the dramatic increase in debt over the past two years against the backdrop of tightening lending conditions, the risk is that we see more defaults and increased crises as low-income countries battle to repay their debts. That said, it is worth noting that China is engaging with Zambia to resolve its debt crisis. Whether China agrees to debt restructuring terms remains to be seen.
  • In the base metals complex, copper received a leg up yesterday as Chile reported its lowest copper output reading since 2011 which raised supply fears. Production from the world’s top producer of the red metal fell by 15% month on month in January and 7.5% year on year according to the bureau of statistics who failed to provide a clear reason for the drop. January is traditionally a lower production month, however there may be additional elements which crept into the lower than usual output such as some mines catching up on maintenance work which was put on hold during the COVID-19 lockdowns. Water scarcity may also be playing a role in the central mining regions who have been plagued by drought for over a de cade now.
  • The Zambian Kwacha kicked off the week on the defensive and is expected to remain under pressure this week as demand for hard currency from importers and corporates on the back of improving economic activity outpaces available supply.
  • Moving over to the US, in response to a question regarding the threat of nuclear war, Biden indicated that there was no reason to change America’s alert levels. The White House has indicated that it has no appetite or desire to conflict with Russia, which is welcome news. It implies that America’s retaliation, for now, will be confined to the passive-aggressive sanctions that have been imposed as Russia’s economy is set to be gradually dismantled.
  • In the way of data, yesterday’s U.S. trade figures made for some ugly reading as it widened to a fresh record high, which will weigh on Q1 GDP growth. Imports rose a further 1.7%, while exports fell 1.8%. The huge trade deficit remains a function of the strong credit cycle the Fed has helped engineer and offers yet another reason why the Fed will likely persist with its objective of normalising monetary policy. 
  • Developments in Ukraine continue to buffet currency markets across the globe. It remains difficult to decide on any clear direction, and the behaviour of the USD reflects that. Although the USD is finding a safe-haven bid that will intensify if Russia makes further headway on occupying Ukraine, this needs to be considered against the dip in U.S. Treasury yields and the prospect of a Fed that becomes more conservative in its monetary policy tightening.

Rand and International FX Commentary

  • Threats from Russia continue to be countered with even more crippling sanctions. With a double-digit recession now on the cards, the Russian economy will collapse. The Western world continues to isolate Putin, the Oligarchs, and any Russian interests abroad, including freezing Russia’s own reserves. The moves have been far-reaching and brutal, and while the final round of sanctions might include the energy markets as well, that is something Western leaders have held off on for now. It goes without saying that such enormous economic pain will be difficult for the Russian population to accept. History is littered with examples of where deep economic recessions often generate the kind of revolt that eventually leads to regime change. Lest we forget, this is all of Russia’s own making, given that their country was not under threat and that they were the original aggressors.
  • For financial markets, this remains difficult to read. The full consequences of the war will not be fully understood for some time to come. Imposing sanctions on Russia is all well and fine, but Russia was integrated into the global economy through trade linkages. Cutting Russia off cuts the sanction-imposing country off too, and the consequence is that they will also suffer a negative growth episode. Perhaps not as severe, but some countries in Europe are more interconnected than others, Germany being one of them.
  • It also implies that the authorities will presumably turn even more tolerant of inflation and not “normalise” policies too quickly out of fear of imposing yet another headwind at this time. US bond yields have presumably dipped on the increased demand for safe havens. At the same time, it also removes the obvious monetary policy divergence argument that has supported the USD in recent months. That would go a long way to explaining why the USD has not surged stronger, despite the uncertain times and the demand for safe-haven assets.
  • For the USD-ZAR, clear direction is lacking. It is subject to the volatility in global markets and the ebb and flow of risk appetite. However, one bit of good news did come in the form of the constitutional court ruling in favour of the government concerning public sector wages. National Treasury will therefore not need to absorb another R29bn worth of expenses and will be able to keep a lid on the public sector wage bill. It paves the way for at least one of the government’s reforms and will please both investors and rating agencies alike. Although that is unlikely to affect the USD-ZAR as developments abroad overshadow such news, it removes one potential source of negative speculation on the ZAR to leave it range bound and focused on EM currency trends.

Nicholas Kabaso

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