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Ukraine crisis is heightening Africa’s fiscal problems

April 14, 2022by Nicholas Kabaso
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Local Market Commentary

  • It was a relatively uneventful day in Zambia amid a dearth of domestic data. The focus was, therefore, on regional and global developments. The effects of the war in Ukraine are far-reaching, impacting global supply chains, pushing up international commodity prices, and in Africa, raising debt risks. In a report published on Wednesday, the World Bank said that Russia’s invasion of Ukraine has amplified sovereign debt risks in Sub-Saharan Africa, increasing the need for better relief measures to avert a large wave of crises in the region’s most fragile countries.
  • In its report, the World Bank said that the percentage of countries in Sub-Saharan Africa at high risk of debt distress has increased to 60.5% from 52.6% in October. Concerns over debt sustainability are reflected in the widening of sovereign spreads for several Sub-Saharan African nations, driven by rising interest rates in developed economies and the war in Ukraine.
  • Prior to the war, debt levels in Sub-Saharan Africa had risen notably due to the adverse impact of the Covid pandemic on government revenues and increased expenditure to cushion their respective economies and health systems. The World Bank noted that self-imposed austerity programs and Covid-19 relief measures that sought to provide some of the world’s poorest nations with the fiscal space to address health needs, stimulate their economies and help reduce debt or vulnerabilities have been insufficient.
  • The World Bank added that the G20’s debt suspension initiative, which three African countries, namely Chad, Ethiopia, and Zambia, have partaken in, has been fruitless so far. Given the slow progress, the World Bank said that African countries will have to think twice about taking on new loans.
  • In addition to the fiscal issues that many African countries will face, the World Bank said that the high and increasingly vulnerable debt levels are among the factors that’ll lead to Sub-Saharan Africa’s regional economic growth decelerating to 3.6% this year, down from an estimated expansion of 4% in 2021. Inflation in the region is also expected to rise notably amid the external shocks caused by the Ukraine war. The World Bank forecasts inflation in the region to average 6.2% in 2022, up from 4.5% in 2021.
  • In the FX markets, while the Zambian Kwacha was relatively unchanged yesterday, it has been a strong start to the month for the local currency. For context, the Kwacha is the best performing African currency against the USD among those tracked by Bloomberg. The Kwacha has chalked up gains of almost 4% on a month-to-date basis, supported by central bank intervention through the supply of dollars. As mentioned in previous commentary, aside from central bank intervention,  the finalisation of the International Monetary Fund programme will also be key to the local currency’s performance. Approval of the programme could provide some fresh impetus for the Kwacha and potentially see it potentially erase the year-to-date losses and rally further. However, a potential delay in the programme suggests Zambia’s fragile fiscal position will remain a headwind for the local currency.
  • China has hinted that it may ease monetary policy to support its economy and help offset some of the effects of the lockdown restrictions. Stock markets have rallied, and U.S. Treasury yields have retreated off their highs. The USD has responded negatively and weakened off its best levels to lend some support to global currencies ahead of the Easter long weekend. With the exception of the ECB decision and statement later, the market is likely to take any data, including the U.S. retail sales data, in its stride, and some consolidation is therefore on the cards. The USD’s retreat has prompted bouncebacks in both the EUR and the GBP to 1.0910 and 1.3135, respectively.
  • Moving over to the base metals complex, we see the bellwether for economic health, copper, taking a backseat for the most part over the past month. The 3m LME contract has pivoted around the $10300.00/tonne mark for much of March and all of April thus far. Threats to supply from the likes of Peru are being offset against lower growth expectations out of China, while investors are still unpacking what higher inflation out of the United States does to the metal in the short term.


Rand and International FX Commentary

  • In and amongst the pandemic, KZN experienced the looting and rampage of mid-2021. No sooner had it started recovering from that, but it has experienced devastating flooding, described by President Ramaphosa as a catastrophe, with more than 260 dead, infrastructure damaged and economic livelihoods destroyed. It has come as a hammer blow to a province that could barely cope with what it was already dealing with. The social and economic impact of this will be severe, but so too will be the cost to the fiscus as roads, bridges, water reticulation, and electricity infrastructure need rebuilding. The impact of all this economically speaking cannot be understood at this stage, but there are serious concerns that transportation routes have been destroyed or severely disrupted. The cost to the economy over and above the loss of life is the disruption to SA’s busiest port and a major supply chain for the country.
  • Whether that disrupts SA’s trade balance to any significant degree will be better understood in the coming months. SA’s exposure to commodity prices has helped it weather the storm of geopolitical risks and uncertainty better than most. However, SA might’ve performed even better had the mining industry been allowed to function as well as it could’ve. Fraser Institute’s Annual Survey of Mining Companies paints a deeply disappointing picture for SA. From there where the mining industry formed the backbone of SA’s economy and was enormously influential in driving SA’s industrialisation, it now ranks a lowly 75th out of 84 jurisdictions based on attractiveness to mining investment. It is an indictment on this government that a sector once so prominent has been relegated to the backbenches of the global investment community. 
  • One can only speculate how much stronger the SA economy might’ve been, how many more people could’ve been employed and how much stronger the ZAR would be if the mining sector was allowed to operate efficiently with the necessary investment to facilitate it all. Policy uncertainty, a rent-seeking government, obstructive labour laws and an unfriendly business environment that prioritised ownership above employment and social progress have ensured that transformation didn’t occur.
  • That leaves the ZAR performing well because of circumstances not of SA’s doing. It also means that the country will be subject to the cyclicality of the drivers of this windfall and has less influence to control outcomes. Mining companies may reinvest some of their windfalls into future production, but that will come too late to take advantage of the current environment. Supernormal profits will be enjoyed, and for now, a positive trade balance generated to support the ZAR. However, investors are reminded that it is cyclical.
  • Heading into the Easter long weekend, position-taking will likely settle down, and the comments above may have little bearing on the near-term performance of the ZAR. Suffice to say that the ZAR’s resilience might prove difficult to sustain over the longer term and that importers should recognise that these levels offer some value. With stock markets a little higher overnight and with the USD on the defensive, there is every reason to believe that the ZAR will remain reasonably well supported into the weekend.

Nicholas Kabaso

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