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IMF cites progress but talks set to continue with Zambia

March 5, 2021by Nicholas Kabaso
  • Following the completion of its virtual mission to Zambia, the International Monetary Fund (IMF) indicated that progress had been made, but talks would continue in the coming weeks, given significant challenges remain. The IMF added that work towards implementing fiscal re-forms to correct large fiscal imbalances, ramping up revenues and improving governance was still needed and that Zambia’s debt load was considered unsustainable even before the pandemic. On the growth, the IMF forecast Zambia’s economy to have contracted by 2.9% in 2020.
  • In a statement released by Finance Minister Bwalya Ng’andu, the ministry expressed its commitment to securing an IMF program. Ng’ andu was quoted as saying, “we value the work we have embarked on with the IMF and will pursue our discussions on detailed policy measures to return our economy and public finances to a sustainable trajectory”. With the Washington-based lender stating that talks are set to continue, bonds may remain supported for now. However, given Zambia’s track record with IMF when it comes to negotiations, the progress might be slow, and risks exist a deal is unlikely before the general elections.
  • On the base metals front, Copper has contracted further overnight driven by the Fed stance on bond yields as well a rise in inventories moni-tored by the LME. The 3m benchmark fell by the most since March 2020 closing below the $9000.00/tonne mark as stale longs were forced to bail. Pulling back the lens we see that the copper remains the outperformer and a pull back is healthy post the almost vertical rise during the first two months of 2021. Fundamentals are still supportive of copper and thus we expect some bargain hunters to emerge in due course.
  • Stateside, Democrats in the Senate used their simple majority to take up Biden’s $1.9trln stimulus aid bill.  All 628-pages are now being read out aloud, after which final passage will be assured. That will likely take place over the weekend, after which Biden will sign it into law and the disbursements can begin. It offers a significant boost to the economy and will only serve to strengthen the current business cycle which was already on a steady upswing. 
  • This raises some interesting questions about the Fed’s stance. The Fed is choosing to reiterate its commitment to remaining ultra-accommodative for the foreseeable future as it seeks to help reflate the economy. The problem, is that the massive amount of monetary and fiscal stimulus threatens to undermine the recovery by virtue of the impact it has had on bond yields that have continued to surge higher. This poses a risk both to the government as well as the private sector and might ironically induce further intervention from the Fed despite the expectation of an inflation episode as the authorities seek ways to control the yield curve and keep funding costs low.
  • While that will hold implications for the economy more broadly, today will see the latest iteration of the non-farm payrolls released. All eyes are on the US jobs report today as investors look to gauge if labour market dynamics are improving to see if demand-side inflationary pres-sures are likely to build. While the January NFPR reading came in well below consensus expectations, we expect to see a notable recovery in the coming months after stagnating at the end of last year, with another massive stimulus package on the brink of being passed and the vac-cine rollout making ground. Against the backdrop of rising bond yields, a stronger than expected print would bolster inflation expectations and raise some concerns over the longevity of the Fed’s ultra-accommodative policy stance.
  • Shifting to the FX markets, the USD has surged again with the rise in bond yields the catalyst. Compared to its DM peers, the USD will now attract further interest by virtue of the yield attraction which is growing. Add to that the rise in risk aversion and rotation from higher beta currencies and the shift back into the USD has been significant enough to help boost it past the prior high seen in early Feb. The USD now holds the potential to surge even further as a “bull flag” formation also breaks out to the topside on the technical charts. All eyes will be on the US labour data this afternoon. If it surprises in its strength, the USD could extend its surge.
  •  Locally, the Kwacha is expected to remain on the back foot next week as Zambia’s debt challenges underpin negative sentiment, denting investment inflows and the local unit’s performance.

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Nicholas Kabaso

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