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Local Market Commentary
- Against the backdrop of tightening monetary policy in many countries, the war in Ukraine, soaring inflation, persistent supply chain pressures and China’s covid-zero policy, the World Bank lowered its 2022 global economic growth forecast on Monday. The World Bank now expects the global economy to expand by 3.2% in 2022 compared to its previous projection of 4.1%. This comes on the back of global growth of 5.7% in 2021.
- The World Bank’s global growth revision was announced before policymakers from around the world head to the US this week for the spring meetings of the World Bank and the International Monetary Fund. Policymakers are expected to discuss the number of crises facing the global economy, with the main focus set to be on inflation and Russia’s invasion of Ukraine.
- The World Bank President David Malpass said in an interview on Monday that the combination of downside economic risks is expected to drive up global poverty rates as countries worldwide face sudden increases in energy, fertiliser, and food prices. Moreover, the World Bank head said that rising interest rates are expected to slow growth and exacerbate inequality. This is expected to be even more pronounced in Africa than in other parts of the world.
- Local news outlets reported that the New Heritage Party has challenged the government to reveal its plan if the outcome of the Debt Sustainability Assessment and Creditors Committee discussions does not succeed in light of the complexity of creditor coordination. Party President Chishala Kateka told reporters that there seems to be an impasse or obstacle in the discussions with Zambia’s creditors, adding that the IMF has been waiting for the Debt Sustainability Assessment and the outcome of the Creditor’s debt relief discussions. Kateka has called on the government to share its plans for the way forward should the $1.4bn IMF bailout package not actualise and what plans it has for the repayment of the $750 Million Eurobond that is due this year in September. While an IMF deal is unlikely to be signed off in the near term, we remain optimistic that Zambia will manage to finalise a deal with the IMF towards the end of this year or next year once it has sorted out issues with its creditors.
- China’s new ambassador to Zambia Du Xiaohui has arrived in Zambia to further strengthen ties between the two countries. The Chinese envoy arrived on Sunday and was received by representatives from Zambia’s Ministry of Foreign Affairs and International Cooperation as well as officials from the embassy, according to a statement posted on the embassy’s website. Investors will be closely monitoring new scrollers for any comments on China’s stance towards Zambia’s debt. Recall that China is one of the main creditors reportedly standing in the way of Zambia’s debt restructuring and one of the main components needed for Zambia to conclude a deal with the IMF.
- Keeping with the IMF, The focus for traders both locally and abroard in the session ahead will be on the release of the Fund’s World Economic Outlook, which is scheduled to be published today. The report will provide an in-depth update and forecasts on key economic and fiscal metrics for African countries which forms the bedrock for many models and macro interpretations going forward.
- In the FX markets the broader theme at the moment is one of risk off. The dollar is on the front foot this morning pressuring emerging markets across the board. Given this backdrop we may see the local unit experience some pressure at the get go as the macro themes impact, equally we expect the liquidity and pricing conditions to improve as the UK and South Africa return from their Easter Break
Rand and International FX Commentary
- Following the Easter weekend, trading volumes will start to normalise, but the news that needs to be absorbed is not positive. The full scale of devastation of the floods in KwaZulu Natal is only now being understood, and with over 400 people dead and huge amounts of infrastructure decimated, it is clear this will impact the SA economy, and a massive reconstructive effort will be needed. As a result, President Ramaphosa restored the national state of disaster to allow the government the flexibility to urgently prioritise repairing the damage to the ports and surrounding infrastructure. While this may offer opportunities for the construction companies, the fiscus will need to accept yet another burden to stretch the fiscus further.
- Eskom has also reported more planned outages, and the grid remains constrained. Load shedding has re-emerged to constrain production when SA’s biggest port is performing sub-optimally. Weak growth environments are not always bad news for the ZAR if they curtail imports. However, this time, the disruptions might impact the country’s ability to take advantage of the buoyant commodity prices, which has to be factored into calculations.
- The danger to SA is that it won’t be able to capture the full benefits of buoyant commodity prices. The gold price is elevated, as are the prices of industrial metals. Offsetting that is the surge in the oil price, which will detract from SA’s terms of trade, there is a third factor to consider when taking a position on ZAR that should constrain its resilience and raise the possibility that the ZAR comes under some pressure.
- Last but not least, the war in Ukraine rolls on with no end in sight as yet. Geopolitical risks remain elevated, and while that has supported the ZAR in the past, there is an increased risk that this will translate into further volatility on stock markets that are weighing the growth consequences against a backdrop of tightening monetary policies. Although many factors can contribute to ongoing ZAR resilience for a while longer, one gets the impression that a near-term correction of sorts could easily unfold