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The pace of economic recovery in Sub-Saharan Africa slows in May

June 7, 2022by Nicholas Kabaso
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Local Market Commentary

  • AVIC International and Velos Enterprises have been shortlisted to expand the Lusaka-Ndola road, according to reports citing Infrastructure, Housing Urban, and Development Minister Charles Milupi. Note that China Jiangxi Corp. for International Economic & Technical Cooperation won a $1.25bn contract to build the road in 2017, but new President Hakainde Hichilema‚Äôs government canceled the deal, saying it was too expensive. AVIC is a Chinese state-owned company that built other roads in Zambia, and the Luska-Ndola highway is a key export route for copper and cobalt. While the Hichilema administration has focused on strengthening relations with countries, including the UK and US, investors will be watching closely whether Chinese construction companies continue to win the majority of road contracts in Zambia.
  • Monday saw the last of the May African PMI releases, which we use as a high-frequency gauge of economic health. PMIs in Sub-Saharan Africa broadly fell in May, with the headline readings for Ugandan, Kenya, Nigeria, Ghana, Zambia and Mozambique all dropping on the month. As such, the SSA PMI average fell from 51.4 in April to 50.6 in May, its lowest level since August 2021. While the gauge edged lower in May, it must be noted that it remains buoyed above the 50-point mark in expansionary territory.
  • In the base metals complex, copper gained 2.55% yesterday to close just short of $9750.00/tonne as declining inventories and the hopes of an economic revival in China post the hard lockdowns supported the metal. This morning we have the benchmark 3m LME contract exhibiting a mildly offered tone as a stronger dollar takes the shine off it as we head into the EU session.
  • In the FX market,  Zambian Kwacha bulls remained in control at the start of the week, with the local unit advancing for a third straight session. The Kwacha is finding support from an increasing hard supply of currency from corporates buying the local currency to pay taxes. Note that this week companies will be preparing for PAYE tax due on Friday.
  • This morning the USD has picked up some support once more, enjoying the rise in bond yields which have again surged on expectations that inflation may remain elevated for longer and that the Fed will remain hawkish. The higher bond yields were evident in other major jurisdictions as well, with U.K. bond yields following suit, but maybe for different reasons. In the U.K, investors are concerned that the political instability that will come from a split Conservative party could eventually translate into more fiscal support for the economy as the party tries to shore up support. Fiscal risk priced into bonds will rise, and the expansive fiscal policy would run against the BoE’s inflation fight. The result has been the USD appreciating against the EUR, which is now trading back below 1.0700 and the GBP trading back below 1.2500. However, the most significant move came against the JPY, trading at almost 133.00 vs the USD, as monetary policy differentials take their toll on the JPY.


Rand and International FX Commentary

  • Some USD strength towards the end of yesterday’s trading session and overnight put the brakes on the ZAR’s appreciation, which appreciated to its best levels in almost two months. Although technically, the ZAR has dipped into near-term overbought territory, that did not stop the pair from plumbing fresh 6wk lows and showing the potential to appreciate further on any improvement in global risk appetite.
  • Other than the USD’s slide in the past 2-3 weeks, it is very difficult to ascribe any clear-cut reason for the ZAR’s recovery other than the usual suspects of a positive trade and current account, attractive yields, positive ZAR Sentiment and nominal undervaluation. It just goes to show just how much influence the valuation in the USD has in determining the broader direction and that it matters that the USD is at least 20% overvalued on a trade-weighted basis. Any unwinding of this valuation will make the ZAR appear stronger than it really is.
  • Overnight, it was good news to learn that the Gupta brothers had been arrested in Dubai on charges related to SA’s state capture. If the alleged criminal masterminds can be brought back to stand trial, that will be a huge step forward in restoring accountability in a country that has lacked so much of it in the past decade. They have much to answer for and will likely shed light on just what kind of role the Zuma administration and the former president played. This should be considered a ZAR positive development at the margin, but there is still a long way to go before any of the Gupta family stand trials in South Africa.
  • Furthermore, although the country is still suffering from the damage done during state capture, this story is old, well understood through the Zondo commission, and has very little influence over FX flows. One could argue that State capture eroded confidence in SA and discouraged investment, but that has taken place for over a decade. State maladministration is arguably, even more to blame for this. Therefore, short and medium term ZAR direction will be taken from the USD for the time being.

Nicholas Kabaso

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