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Kwacha rallies on debt restructuring

April 25, 2022by Nicholas Kabaso
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Local Market Commentary

  • Zambian bulls can take a deep breath following reports that China is willing to participate in the effort to restructure Zambia’s foreign debt. Chinese officials told the International Monetary Fund and World Bank that it would join the Zambia creditor committee, according to IMF Managing Director Kristalina Georgieva.
  • This is a massive step forward in the restructuring process for Zambia’s estimated $17.3bn foreign debt, which is one of the key hurdles standing in the way of Zambia securing a program with the IMF. China was reportedly the only creditor stalling the much-needed debt restructuring process.
  • Commenting on the matter,  IMF Managing Director Georgieva said, “We were very pleased to hear from Governor Yi Gang… a very specific commitment to join the creditor committee on Zambia and work expeditiously for debt resolution.” Georgieva added that China also committed to the Common Framework debt restructuring process.
  • With China now willing to participate in the debt restructuring, it is looking highly likely that Zambia will conclude its deal with the IMF within the next few months. In December, Zambia reached a staff-level agreement for a $1.4bn IMF bailout, including a debt sustainability analysis that will form the basis of talks between the country and its creditors. The developments over the weekend are likely to provide a tailwind for domestic at the start of the new week despite developments in the base metals markets which we will highlight in the points below.
  • Base metals are vulnerable this morning as investors pare back long positions as a result of sustained COVID-19 lockdowns in the top consumer China raising fears of demand destruction and a slowdown in global economic growth. Equally, a tightening of US monetary policy is threatening to cool the demand dynamics in the world’s largest economy.
  • 3m LME copper has taken a peek below the $10000/tonne mark this morning after shedding 1.72% on Friday to close at $10110/tonne. 3m Aluminium is currently trading just short of 2% down on the session at $3183.50/tonne as we head into the EU open. All in all an uncomfortable start for the base metal bulls today.
  • Moving onto oil, this morning, oil prices have continued their slide from Friday as global markets remain in risk-off mode. China reported a record number of new COVID cases over the weekend, which has sent Asian stocks tumbling and weighed heavily on the outlook for demand for crude. The estimated reduction in Chinese demand will be around 1.2mn barrels a day, according to sources within China’s energy industry. As a result, we have the front-month Brent contract trading around $103.75 per barrel, while WTI has fallen below the $100 mark. The declines have seen the Brent contract fall below its 50-DMA, a key support level that held up through last week. With this break, the bears will be eyeing the $100 per barrel handle as the next key support level.
  • Meanwhile, Libya is expected to resume output from its shuttered fields over the next few days, easing some of the supply concerns that were present through last week. As a result, Brent’s prompt timespread has narrowed to around 50 cents in backwardation, well below the levels above $4.00 per barrel seen during oil’s peaks in  March. This suggests risks may be tilted in favour of the downside for now

Rand and International FX Commentary

  • Stock markets the world over are under pressure this morning, and heavily. There is no respite as risk aversion across the globe ramps up, with the VIX trading at its highest levels in five weeks. 2yr US Treasury yields have risen to the highest levels in three years, the gold price has responded to the more hawkish central banks, and even Oil prices have extended their losses, edging back towards the $103pb mark.
  • The risk always existed that persistent hawkish talk from central banks would eventually weigh on market sentiment, which now appears to be unfolding. Stock and bond markets are now pricing in the inevitable slowdown from ongoing hawkish policy talk. While it may be a case of talking tough to force the markets to adjust and start the process of unwinding stimulus without having to act tough, it is becoming abundantly clear that central bankers are not done yet. Investors are pricing in the possibility that because central banks are behind the curve, they act too forcefully, in too short a space of time and disrupt asset pricing the world over.
  • So far this year, the ZAR has traded like a safe-haven currency. That, however, came to a screeching halt last week when the ZAR collapsed spectacularly, losing approximately R1.00 in a week. Flows related to Barclays’ sale out of ABSA may have been the original catalyst. Still, a flurry of events tipped the scales against the ZAR. These ranged from some stops being triggered by the sudden move by the ZAR, a rise in risk aversion globally, the pricing in of more hawkish central banks, geopolitical risks out of Ukraine and the effects of the latest round of lockdowns in China.
  • That does not mean that all previous bullish perspectives on ZAR have been completely revised. The clear-out that unfolded will help reset markets to a more fundamentally sound level. In one week, the ZAR has undone the bulk of its overvaluation and will now be trading closer to fair value. It is also better positioned to respond to fundamental drivers such as the strong terms of trade, commodity prices and a domestic economic slowdown. All three factors have been supportive of ZAR appreciation in the past

Nicholas Kabaso

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