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Moody’s completes a periodic review of Zambia’s ratings

May 26, 2021by Nicholas Kabaso
  • Zambian financial markets reopen today, having been closed yesterday on account of the Africa day public holiday.
  • Moody’s on Monday announced the completion of a periodic review of Zambia’s ratings. According to the ratings agency, Zambia’s credit pro-file (issuer rating Ca) is constrained by the country’s “b2” economic strength, reflecting its small size, low per capita income, and persistent economic challenges. The “caa3” institutions and governance strength takes into account a weak governance profile, very low fiscal policy credibility and effectiveness, as well as a track record of arrears and the recent default. The “ca” fiscal strength reflects unsustainable debt dy-namics that have increased the likelihood of a sovereign debt restructuring resulting in large losses to private-sector creditors, as well as weak debt affordability metrics due to increased cost of debt and reliance on commercial debt. Finally, its “ca” susceptibility to event risk is driven by acute liquidity and external pressures, which the pandemic has intensified, limiting its capacity to service debt and leading to the default on its Eurobond.
  • Base metals are still experiencing the aftermath of China stating that they are going to curtail wild price swings and strength controls around commodities in their five-year plan from 2021-2025. Most have taken this to mean that they will at some point look to curtail any speculative activity and there are those that have gone so far as to say they may even adopt a similar approach to their stance on crypto where they have banned certain activities outright.
  • We see this as an extreme view and favour a strategy where the Chinese will aim to smooth prices rather than curtail trading activity.
  • The dollar has provided the copper market with a leg up this morning. 3m copper was quoted just above the $9950.00/tonne mark earlier in the Asian session. In addition, strike action out of Chile is supporting the red metal this morning.
  • As the economy improves and stages a recovery in H2 2021, the Fed will be forced into reconsidering the future of monetary policy. Although Fed officials have been at pains to point out that they will not deviate from the ultra-loose stance until their full employment and inflation mandates are met, there are signs that the tapering of asset purchases is becoming a topic of conversation. For now, lessons learnt from the taper tantrum in 2013 and the communication this time around will be more telegraphed to desensitise investors to the change. However, that point is still far down the line and more likely to be a 2022 rather than a 2021 issue.
  • Yesterday’s data confirmed that the US economy is on the recovery path, even though the consumer confidence data and new home sales retreated off their recent highs. Consumer confidence dipped slightly to 117.2 in May, but continued to hover around a 14m high, while new home sales fell 5.9% m/m in Apr, although still posted an increase of 48.3% y/y. Of course, the lockdowns skewed the data a year ago, but the activity in the sector remains buoyant. Add to that the rise in house prices and household balance sheets have strengthened. This will assist the underlying credit cycle build momentum and assist the broader recovery through the improved financial comfort that it will offer many households. Thus, once again, the data builds the narrative that H2 2021 will be substantially better than years gone by.
  • Against the backdrop of an improving economy, Senate Republicans plan on unveiling a counter-offer to President Biden’s $1.7trln infrastruc-ture proposal. Indications are that the proposal will be more targeted and less than half Biden’s proposal in size. Although it is a general step towards a more compromised solution, both sides will remain relatively far apart. Neither side is expected to capitulate, implying that the Democrats will need to collaborate amongst themselves to ensure that the bill passes through the Senate.
  • No change to the depreciative bias that remains intact with the USD finally punching through tough support at last week’s lows. The technical bias remains to the downside for now and was strengthened by Fed officials that reiterated their view that inflation will be transient and that policy will remain ultra-accommodative for a while to come. As yet, none of the data that has been released is strong enough to warrant a ma-terial change in US monetary policy, although at some point, the topic of tapering may backstop the USD and put a floor to the current slide.
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Nicholas Kabaso

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