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IMF warns Russia-Ukraine situation could derail growth recovery prospects on the African continent

March 11, 2022by Nicholas Kabaso
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Local Market Commentary

  • In a statement on Thursday, International Monetary Fund Managing Director Kristalina Georgieva warned that Russia’s invasion of Ukraine threatens to undo Africa’s progress in recovering the damage from the coronavirus pandemic and presents a new challenge for the continent. Georgieva highlighted four ways in which Africa is vulnerable. These include increased food prices, higher fuel costs, lower tourism revenue and potentially more difficult access to international capital markets. Georgieva added that “a recalibration of policies appears inevitable in many countries” and that “the fund stands ready to help African countries reduce the cost of any needed policy adjustments through policy advice, capacity development, and lending.”  Recall in 2020, the IMF provided 13 times its average annual lending to sub-Saharan Africa and increased access limits to its zero-interest lending that comes mostly without the fund’s traditional conditions.
  • It was a mixed bag for base metals yesterday as aluminium and copper finished in the green while lead and zinc finished the Thursday session in the red. 
  • Aluminium has continued its march higher this morning, the metal is currently trading 1.97% up at $3495.00/tonne at the time of writing and we cannot rule out further gains into the close of the week. That said, investors are wary of pushing the boundary too far given what happened with nickel earlier in the week. The LME halted trading after wild price action took the metal north of $100 000/tonne. Trading may resume today.
  • In the local FX market, the Zambian Kwacha is expected to weaken further next week as demand for hard currency outweighs supply.
  • With each passing day, the U.S. ratchet’s up pressure on Russia. Following the sanctions already imposed, the U.S. now wants to revoke Russia’s special trade status that would force trade with Russia across the G7 to be conducted with more barriers and restrictions, including the imposition of tariffs on a wide range of goods. Furthermore, in its spending bill, the U.S. raised a further $16.3bn worth of funding aid it would grant Ukraine in a bid to assist the country in its war against Russia.
  • Wall St looks set to end the week on the defensive as investors express disappointment at the breakdown of talks between Ukraine and Russia with the two sides poles apart. The war is set to continue. With Russia now making some progress, it would seem that geopolitical tensions will remain high, underpin energy prices, and detract from overall GDP growth expectations for the future.
  • Into the week’s final trading session and the USD once again finds itself consolidating. There are many moving parts and many offsetting forces that make direction-finding difficult. Risk appetite remains tentative, with equity markets on the defensive, which should keep a bid in the USD alive. However, momentum is weak, and with nothing more than the Michigan sentiment data scheduled for release today, the focus will remain on developments in Ukraine and how those might affect broader market sentiment.

Rand and International FX Commentary

  • The USD-ZAR has adopted a more consolidative tone above the 15.00 handle as we close out the week. Direction in some key markers has also been lacking, with the USD struggling for direction, as is gold and some other minerals. If it’s one bit of good news, the oil price retains a slight bearish tilt and appears set to end the week below $110pb, with concerted efforts to find new sources of oil production a key factor behind this. It comes as some relief that markets have remained as stable as they have despite the talks between Ukraine and Russia breaking down.
  • On that front, there appears to be no end in sight to the current conflict and if anything, Russian forces have made some headway in the south-east of Ukraine as well as in their advance on Kyiv. NATO still refuses to announce a no-fly zone over Ukraine as they seek to remain true to their intended purpose of being a defence block for NATO members. Membership of NATO was one of the justifications used by Russia to invade Ukraine, and if it got involved, it risked escalating the war to something potentially much more catastrophic.
  • Domestically, SA continues to struggle through another bout of load-shedding. It comes as a stark reminder of all the difficulties SA faces. The high commodity prices at the moment mean SA is better placed than most countries to weather the current geopolitical turmoil, but it is unclear whether SA has enough capacity to take full advantage. Oil prices offset some of the benefits of the high commodity prices. At the same time, SA’s inability to export efficiently due to underperforming state assets in Transnet and the ports reduces the overall windfall.
  • Nonetheless, this week’s current account data showed that the ZAR still enjoys some support even though the surplus narrowed. That support has recently received a fresh boost due to the sharp rise in SA’s terms of trade. It means that the ZAR will enjoy the benefit of appreciative support for a little while longer, and ETM’s proprietary models concur. SA ranks high on carry attractiveness, and the ZAR Sentiment Indicator implies a recovery back to 14.500/dlr or below in the coming six months. Furthermore, the ZAR remains undervalued on a purchasing power parity basis and has enjoyed some improvement in the country’s fiscal risk metrics. All this will ensure that the ZAR remains poised to retain its more consolidative bias as we head into another weekend of uncertainty.

Nicholas Kabaso

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