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 The outlook for Zambian bonds rests on the government securing an IMF deal

March 30, 2022by Nicholas Kabaso
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Local Market Commentary

  • Zambia has made its way back into the spotlight following reports from local media that the country’s creditors are due to form a committee to assess the sustainability of the nation’s $31.74bn debt and how the debt can be restructured. The reports come following comments from Finance Minister Musokotwane in parliament on Friday that a committee will be formed within the next few weeks.
  • The discussion over Zambia’s debt sustainability is a step that should help the country unlock a much needed $1.4bn credit facility with the International Monetary Fund that was passed at a staff level and now awaits the final stamp of approval by the international lender’s board. Commenting on the IMF deal, Finance Minister Musokotwane noted that “everything is going to plan,” adding that the Debt Sustainability Analysis, which forms the basis of the country’s restructuring plans, had been completed.
  • Zambia’s debt pile currently sits at an eye-watering 120% GDP, making it one of the most fiscally fragile countries in the world. Recall that Zambia was the first African country to default on a debt repayment during the Covid-19 era. Zambia defaulted on an interest payment in late 2020 under the previous government. However, under the new government, the country has made some massive strides in terms of resolving its debt crisis, with the Hichilema administration initiating processes to restructure the country’s debt while at the same time rolling out much-needed reforms.
  • Although the country still finds itself in a very fragile position, it is looking more and more likely that the country will strike a deal with the IMF, which the Finance Minister hopes to have completed by the middle of the year. From a financial market perspective, investors continue to demand a massive fiscal premium for holding Zambian bonds. It is worth noting that bonds yields have fallen sharply under the new government amid promising signs that President Hichilema is steering the country toward a more sustainable debt path.
  • For Investors and Zambian bond bulls, it is imperative that the government seals a deal with the IMF. It will significantly boost investor confidence and confirm that the country is making meaningful progress toward unwinding almost a decade of wasteful fiscal expenditure. For now, we remain cautiously optimistic about the outlook for Zambian bonds.
  • In the base metals complex, copper, zinc, lead and aluminium all finished in the green yesterday while nickel continued to correct with sharp losses noted. Better risk on conditions supported the market yesterday but concerns over Chinese demand did place a cap on any outsized gains.
  • This morning focus in Asia has once again been with China and its response to rising COVID-19 infections. There are concerns that Beijing’s heavy handed approach to stamping out the virus will hit economic growth and dynamism in the world’s largest consumer of base metals. The 3m LME benchmark copper contract is currently trading 0.25% lower at the time of writing coming in at $10315.00/tonne going into the EU open.
  • Meanwhile, Codelco, Chile’s state owned copper producer is looking to offer to the market some “non-core” exploration assets. This is rare move by the world’s largest copper producer and could signal the start of a partnership strategy, which would be a new business model for the copper giant. 
  • Shifting to the FX markets, once again, the USD struggled to gain traction overnight. The potential inversion of the US yield curve has forced investors to look beyond the near-term rate hikes. The risk is that the Fed is behind the curve and will seek to catch up in a move that could be disruptive to financial markets and the economy. Intra-day, some consolidation is now anticipated, likely translating into many other currencies doing the same. Equity markets are mixed, and overall levels of risk aversion are contained. The GBP is on the defensive, with focus turning to the BoE and the guidance it will give for monetary tightening against the backdrop of the war in Ukraine and the knock-on effects on the EU. Against the USD, the GBP has cracked below 1.3100. This, at a time when the EUR is flat against the USD, trading just below 1.1000 and the USD index is consolidative.

Rand and International FX Commentary

  • Still, the USD struggles with clear direction, and it has spilt over into the ZAR. The USD backed away from its intra-day highs and helped the ZAR recover from its lows. With so much data scheduled this week, there is bound to be some caution and apprehension amongst local investors. It is also quite telling that the USD is struggling to gain more ground when it remains the standout hawkish developed market central bank in the world at the moment. The BoJ is stimulating, while the ECB will not budge on normalising while there is a war that holds economic consequences for the bloc. The BoE is turning a little more sensitive to growth, and the BoC and RBA are biding their time while telling the world they will act tough if needed. And yet the USD still struggles to gain more ground.
  • Some would argue that a lot has been priced in, which would be true. But equally important is the inflation differential that confirms that ultra-loose monetary policy undermined the USD and that the USD’s inability to gain ground despite risk aversion is justified. Rate hikes in the US are happening for a reason. The US is running record high twin deficits, and the countervailing market response would be a rise in rates. The faster that rates rise, the quicker the correction, and so while at face value, this creates a positive carry for the USD, the flattening of the US yield curve, which might soon invert, tells a different story.
  • So the USD is struggling with traction, but some negative attention will fall SA’s way today through the release of the latest non-farm payrolls data that will show that SA’s narrow definition of unemployment rose above 35%. This is a desperate situation, and it is telling that SA’s very strong terms of trade have done so little to boost formal employment. The unemployment rate will drop as the year unfolds, and SA eventually opens up fully in a boost to tourism and other sectors, but there has been much damage done. The only silver lining to this cloud is that it has kept consumption restricted and has assisted the trade account to remain in surplus through weaker demand for imports.
  • A strong trade account remains a feature of the SA economy, and investors will receive an update on this later this week. For now, some directionless consolidation is on the cards. The main drivers will be a combination of data and geopolitical events unfolding abroad. Financial markets are now settling down, and as peace talks unfold, the markets will steadily move to price in some resolution to the conflict and readjust to a new reality. For the USD-ZAR, that implies a 14.55/8000 range looks realistic. 

Nicholas Kabaso

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