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May Stanbic/ Markit PMI data in focus

June 3, 2021by Nicholas Kabaso
  • May PMI data out Zambia will offer further insight into the extent of economic recovery. It is worth noting that at 50.1 in April, the improve-ment in the health of the private sector was fractional, and going forward, it remains to be seen whether the rebound will be sustained. Slow progress on the vaccination front and the threat of a third wave of the coronavirus pandemic pose downside risks in the coming months.
  • Zambia has made some notable strides towards securing a bailout program with the International Monetary Fund and has shown signs that it is willing to work on the much-needed structural reforms as required by the international lender. That said, the Southern Africa copper producer is yet to secure a deal with the IMF, and as such, investors remain wary of turning bullish on Zambian debt.
  • The degree of fiscal risk being priced into Zambian bonds is reflected by the massive premium demanded by investors for holding Zambian Eurobonds and by the fact that the curve is inverted. The shorter-dated 2022 Eurobond yield is trading at a notable premium to the longer-dated 2027 Eurobond yield. For context, Zambia’s 2022 Eurobond currently sits at 39.39%, significantly higher than levels seen prior to the COVID-19 outbreak, which accelerated the country’s pace of fiscal degradation over the past year. While elevated relative to the comparable bonds of its regional peers, Zambia’s 2027 Eurobond yield is trading at a notable discount to the shorter-dated 2022 bond at 17.90%.
  • The inverted market structure is very uncommon and is reflective of a country in fiscal distress and facing an immediate fiscal crisis. Recall that Zambia defaulted on an interest repayment to bondholders at the backend of last year, essentially putting the country into default. Going forward, we are likely to see the degree of inversion compress in the weeks ahead, with the government showing some signs that it is com-mitted to implementing fiscal reforms required by the IMF in order to secure a bailout program and as international copper prices continue to soar, providing a boost to the country’s coffers. That said, given the extent of Zambia’s fiscal challenges, the bond curve is likely to remain in-verted over the short to medium term, reflecting a country in default.
  • On the base metals front, copper came under pressure yesterday but we have since recovered the losses in the Asian session as supply threats from the America’s underpinned prices despite weaker demand in the largest consumer namely China.
  • Meanwhile, Ivanhoe Mining announced that its copper JV with the Democratic Republic of Congo has inked a 10-year deal to process a portion of its copper concentrate at a nearby smelter. Reuters reported the following – Congolese authorities last week reiterated a long-standing ban on copper concentrate exports, and said only mining companies with waivers would be allowed to export concentrate.
  • Stateside, efforts to synchronise corporate tax rates appear to have gained traction. Later this week, the G7 will likely endorse the US’s ambi-tious efforts to capture tax revenues linked to large multinationals that have domiciled themselves in tax-friendly jurisdictions. In addition, governments worldwide are scrambling to extract what taxes they can to assist in rebalancing their budgets that blew out through the pan-demic. Generally, tighter fiscal policies in the coming years will need to become a theme if the authorities want to wean themselves off their dependence on central bank QE efforts.
  • It is worth noting that the Fed is looking to start the process of monetary policy normalisation, although they will do so gradually and with ex-treme caution so as not to disrupt the underlying dynamics of the companies which issued the bonds that they own. It is the first step towards removing some of its stimulus, and the signal this move sends may support the broader rising bias in yields.
  • In the FX market, the Kwacha extended its journey north of the 22.500 mark yesterday as it remains on the back foot. The first of three labour market indicators will be released today in the form of the private sector ADP data. Investors appear to be on hold and range trading ahead of the releases, which will offer a real economy perspective on one of the mandates the Fed targets. The USD has consolidated and appears to have formed a base with multiple attempts to crack below 89.7 on the USD index failing. Some soft data in the next two days could see the USD resume its slide. However, any upside surprises hold the potential to bolster the USD quite significantly given the degree of depreciation the USD has suffered so far this year.
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Nicholas Kabaso

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