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Local Market Commentary
- Regionally, the World Bank and the International Monetary Fund have raised red flags over rising debt levels in emerging and frontier markets. The World Bank estimates that the low-income countries owe $35bn in payments in 2022. While the IMF and the G20 drew up a plan to help provide debt relief for low-income countries in need of financial aid, the program has thus far been fruitless.
- Ethiopia, Zambia and Gabon joined the G20’s Debt Service Suspension Initiative, known as the Common Framework, in 2020 but are yet to benefit from the program. According to the IMF, the Common Framework has been hampered by a lack of coordination, transparency, and clarity. In the absence of fiscal reprieve, fiscal risks in Africa have risen sharply, with the likes of Zambia being the first African country to default on its debt in the covid era.
- A quick look at fiscal risk premiums shows that four African countries, namely Ethiopia, Zambia, Tunisia and Ghana, find themselves in debt distress territory, a position where a country’s bond yields are trading at a premium of more than 1000bps over US Treasury yields. Note that there are a number of other African countries that are also on the brink of fiscal distress
- While headwinds for the Zambian Kwacha remain, the currency has managed to pare back some of its recent losses this month. For context, the Zambian Kwacha has gained just shy of 3.7% against the USD since the start of the month to trade at 17.4250, according to Bloomberg data. The recovery in the Kwacha comes on the back of expectations for the central bank to raise rates further, optimism that a deal with the IMF will be secured over the medium term and elevated copper prices, which are underpinning foreign currency inflows into the country and tax revenues.
- Although there are still a number of headwinds facing the Zambian Kwacha, it is worth noting that currency risks have fallen sharply relative to a year ago. This is reflected by the sharp drop in the ZMW’s currency risk score in ETM’s FX Risk Barometer, which compares a currency’s implied yield relative to historical volatility. Moreover, volatility in the currency has almost halved over the past year, with historical volatility in the ZMW currently sitting just north of 10%.
- Looking ahead, while there is potential for further strengthening in the ZMW, further gains in the currency are likely to be capped in the near term as external headwinds counter domestic tailwinds. That said, we remain somewhat bullish on the ZMW over the next 6-9 months amid expectations that the Zambian government will secure a deal with the IMF in the second half of the year once it has sorted out its issues with some of its creditors, which include China. Bolstering this notion is a rebound in the country’s FX reserves, a recovery in investor confidence and expectations for international copper prices, the country’s main export, to remain elevated.
Rand and International FX Commentary
- Notwithstanding the retreat in the USD, the dip in US Treasuries and some stability in stock markets that has dragged the VIX lower, the ZAR still found itself on the defensive. Once again, the ZAR appears to be trading like a safe-haven currency. As risk measures subside, so the ZAR comes under pressure once more. It is as if commodity prices are currently behaving like the ultimate hedge against geopolitical risk, and any hint that the risk could subside will translate into some weakness in the ZAR.
- It is currently testing a key technical level of the upper bound of a downward sloping channel that began in December. A sustained break of 15.11/12 and the USD-ZAR may well have confirmed an inflection point. Should the break happen, a move as far as 15.50 could be seen in the coming days before some consolidation unfolds. Failure to punch through this USD-ZAR resistance would only confirm that the downward channel remains firmly intact and that another test of the low 14.00s might be seen in the following weeks. It is, therefore, a critical time and deserves to be carefully monitored.
- No significant data releases are scheduled for the rest of the week means that the ZAR will take its inspiration for direction from offshore developments. One eye will remain on the performance of US Treasuries, another on the USD itself, and investors would do well to also monitor the earnings results out of the US that appears to be driving broader market sentiment.
- One slight positive in SA’s favour has been the reduction of load shedding from level 4 to level 3. It is slightly less disruptive and suggests that Eskom is finally regaining control of its productive capacity. Although that is cold comfort for a country battling many challenges on multiple fronts, it is at least one factor that will weigh less heavily on the ZAR. Another factor in SA’s favour is that inflation has remained contained within the 3-6% inflation target band. Although it may still briefly breach the upper limit, the break will not be sustained. SA is likely to enjoy much softer inflation than many of its more developed trading partners to provide some underlying support to the value of the ZAR. It is unlikely that the ZAR’s resilience just evaporated in one week when so many of the fundamentals that drove it, remain intact. Although the ZAR looks vulnerable in the short term, it may not be done just yet.