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The spotlight remains on Zambia as the country desperately tries to secure an IMF deal

June 20, 2022by Nicholas Kabaso
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Local Market Commentary

  • The focus over the weekend remained centred on Zambia as the country edges closer to securing a much-needed program with the International Monetary Fund. China, Zambia’s single biggest creditor, has called on the International Monetary Fund to approve a $1.4bn bailout for Zambia. But the IMF has responded by telling China and other official creditors they must first agree to a relief package. While the recent developments are encouraging, the approval of the IMF deal is likely to still be months away.
  • Zambia has sought debt relief through the G20 Common Framework. The process allows creditors to jointly renegotiate their foreign debt. Zambia’s official creditors met in Paris on Thursday to discuss a way forward for the debt restructuring and relief. At the same time as Zambia creditors met on Thursday, the Director-General of the Chinese foreign ministry’s African affairs department, Wu Peng, visited Zambia to help coordinate China’s response to the situation. 
  • Following a meeting with President Hakainde Hichilema on Friday, WU said the IMF should move quickly to approve Zambia’s $1.4bn program. Wu added that China appeals for the IMF’s early approval and disbursement of the Extended Credit Facility to Zambia so it can move ahead with the debt restructuring and relief. Chinese lenders make up about a third or more than $6bn. The loans from China have been used to fund large infrastructure projects across the country, including airports, highways and hydropower dams. 
  • In a move aimed at easing concerns over its planned debt restructuring, Zambia presented its plan to its creditors on Thursday on how to get its debt under control and requested creditors to give assurances that they would provide relief that could unlock the IMF funding. Although China seems to be playing a key role in the debt restructuring and relief talks, concerns are mounting that Chinese creditors do not want to be bound by a multilateral arrangement like the G20’s common framework, given that it would set a precedent for other heavily indebted African countries.
  • Copper continues to shed ground this morning after closing below the $9000.00/tonne level on Friday. The 3m LME benchmark is currently down around 0.25% this morning as investors express concerns over global growth. Beijing is currently in a bind, the Chinese will find lowering rates at a time when all other major economies are hiking a difficult road to take, even though it may be needed in order to stimulate the Chinese economy following the COVID-19 lockdowns.
  • Supporting the market at the start of the week will be supply-side concerns. Reuters reported that Workers at Chilean state-owned miner Codelco, the world’s largest copper producer, said on Saturday they would start preparations for a national strike after the firm announced the closure of the troubled Ventanas smelter.
  • In the FX markets, the Zambia Kwacha is expected to hold steady against the USD this week amid increasing hard currency supply from companies and continued Bank of Zambia support.
  • The USD has kicked off the new week on the back foot after the Fed’s Mester said on Sunday that the risk of a recession in the US economy is increasing. The modest pullback in the USD has provided some reprieve for G10 and emerging market currencies, which are, for the most part, trading in the green ahead of the European open. Commodity currencies such as the Australian dollar and the Russian ruble are leading the gains this morning. Cryptocurrencies have also managed to take advantage of the weaker USD this morning, with the likes of Bitcoin regaining some lost ground in the Asian session. While the USD is weaker this morning, the broader bias remains decisively bullish, with the trade-weighted dollar buoyed near its highest level since the early 2000s. The monetary policy differential between the US and other major economies suggests that the USD strength is set to persist in the second half of the year or until the path for monetary policy in the US turns dovish.

 

Rand and International FX Commentary

  • Last week, the spotlight was fixed on major central banks and the global war against inflation. Monetary authorities including the US Federal Reserve, Bank of England, and Swiss National Bank all turned more hawkish as they frontloaded their rate hike cycles in respective attempts to rejuvenate their credibility as inflation fighters and anchor inflation expectations. This led to significant financial market volatility and a decline in risk appetite that the ZAR was not able to escape as it depreciated around 1.00% against the USD over the course of the week.
  • While heightened market volatility will likely remain the order of the day in near term, some of the focus may shift back to the domestic front with interesting local data releases in the pipeline. Specifically, the SARB’s leading indicator for April is scheduled for release on Tuesday, and, perhaps more importantly, SA CPI stats for May are scheduled for release on Wednesday. These prints will be viewed for fresh insights into prospective Reserve Bank policymaking, with Governor Kganyago and Co. coming under increased pressure to tighten monetary conditions more aggressively to keep inflationary pressures under control.
  • Furthermore, investors will also have the final instalment of Judge Raymond Zondo’s state capture report to digest this week. It is expected to shine the light on corruption related to the Estina dairy project, the SABC, the State Security Agency, the Passenger Rail Agency of SA, the 2013 landing of the Guptas’ private jet at Waterkloof air force base, and the machinery behind state capture. 
  • The report marks the end of the beginning a cathartic process for the country still suffering from the effects of state capture. And while containing little market-moving potential in itself, the report lays the foundation for policy action that could markedly change SA’s political landscape and improve its attractiveness from an investment perspective. It will therefore be interesting to see whether the Ramaphosa administration acts on the report’s recommendations and implements much-needed reforms aimed at changing the government’s internal ethics code and working culture

Nicholas Kabaso

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