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Vedanta Resources Ltd. confirms suspension of legal action

May 12, 2022by Nicholas Kabaso
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Local Market Commentary

  • In a sign of thawing relations, Vedanta Resources Ltd. confirmed that it has agreed to suspend legal action to reclaim copper mines Zambia seized three years ago, pending talks to settle the dispute. Note Vedanta has indicated that it wants the mines back and has pledged to invest about $1.5bn to revive the operations. CEO Sunil Duggal was quoted as saying, “Vedanta has always been of the view of resolving the  matter outside court without litigation and finding an amicable solution to protect the national asset.” Note the Hichilema administration is seeking to repair relationships with mining companies in a bid to attract more foreign investment, and rebooting production at KCM is central to ambitions to more than triple output within a decade.
  • While much of the focus for international investors was centred on the US CPI print on Wednesday, traders in Africa honed in on fiscal dynamics following a regional report published by S&P. Adding to yesterday’s comment, S&P highlighted that declining global growth, following Russia’s invasion and a slowdown in China, is weighing on the domestic debt carrying capacity of frontier markets in Africa. The global rating agency looks at several variables that contribute to a country’s capacity to manage domestic debt. These include banking sector lending capacity, real yields, debt structure, the size of non-bank financial assets, the cost of debt, debt rollover ratios, and primary fiscal balances. Based on this, S&P found that three African sovereigns stand out for their relatively weak fiscal metrics.
  • The first country flagged by S&P was Zambia. The agency said that Zambia’s debt burden exceeds 120% of GDP, putting it among the highest in Africa. S&P noted that around 50% of Zambia’s debt is domestic, up from 30% in 2018, increasing Zambia’s local currency borrowing requirements to an estimated 22% of GDP in the current fiscal year. This is the third-highest of all the African sovereigns included in the report.
  • The next country pointed out by S&P for its weak fiscal metrics was Egypt. The global rating agency said that even though around three-quarters of Egypt’s debt is denominated in local currency, buffering Egypt’s sovereign balance sheet from exchange rate volatility, the relatively high reliance on non-resident creditors within local currency debt means the government is exposed to shifts in international sentiment to roll over its significant debt burden.
  • Lastly, S&P noted that fiscal metrics in Ghana have deteriorated markedly. The agency said that for Ghana, its modest-sized banking system with a large exposure to the state of almost 40% of total financial assets implies that it has less capacity to absorb additional government debt in the wake of the covid pandemic. Since their lows in 2021, Ghanaian bond yields have more than doubled amid fears over the country’s ability to refinance itself in the international debt market due to tightening global financial conditions against the backdrop of deteriorating appetite.
  • In its closing remarks, S&P said that over its rating history, sovereigns have defaulted on local currency debt only half as often as they have on foreign currency obligations. The agency said that domestic debt carrying measures suggest that pressures on the domestic debt markets are rising, reflecting soaring global interest rates, the adverse impact of the pandemic on fiscal balances, and slowing growth.
  • Moving over to base metals, copper climbed yesterday as finishing 1.2% higher as the market took a breather following the news that US CPI may have peaked. This morning the benchmark 3m contract has erased all of those gains and is presently trading 1.5% down on the session at $9193.50/tonne as Asian investors run scared of Beijing and its response to COVID-19 currently sweeping China. China’s no COVID-19 policy has seen strict lockdowns enforced and this is undoubtedly going to hamper demand from the world’s largest consumer of base metals
  • In the FX markets, consolidation was the order of the day as the Kwacha was relatively unchanged against the USD. Meanwhile, yesterday’s inflation reading was not the big market-moving event everyone feared, even though inflation surprised the market. Despite the upside surprise, inflation appears to be turning the corner. The next few months will be key in determining how quickly inflation settles back down, which will have implications for the USD. The USD remains well supported and on the front foot, but it may be telling that it did launch higher after the data. So much has been priced that it becomes progressively more challenging to buy into what is already an overvalued USD. Against the EUR, very little has changed, although, against the GBP, the USD is still making more ground as the pair falls below 1.2200 for the first time since May 2020. The GBP remains constrained by a deteriorating economic outlook and difficulties regarding the Brexit solution for Northern Ireland.


Rand and International FX Commentary

  • This week’s main event turned out to be less of a “main event” when inflation in the US decelerated to 8.3% y/y vs expectations of 8.1% y/y. It represents a slight moderation from the 8.5% in March, which will satisfy some policymakers that have immediately characterised March as the peak which is now behind us. However, it is still more than four times the Fed’s 2% target. Depending on how the Fed would like to frame this outcome, the markets could gain some support or be punished further.
  • Having experienced the devastating effects of a stock market collapse, Fed speakers may choose to turn a little more sensitive in their communication to avoid a full-blown correction and the destruction of the wealth effect that comes with it. A correction of the current magnitude is manageable without too much economic damage. Allowing a repeat of a 2009 correction would be less constructive.
  • It now becomes a little trickier for investors. With US inflation past its peak, investors now need to choose whether to focus on inflation moderating back towards the target, albeit over two years, or on tightening monetary policy further to accelerate this trend. The correction in the stock market has raised the stakes for the Federal Reserve and holds profound implications for the USD. For context, the USD could not capitalise fully on the slightly stronger than expected inflation reading and continues to trade towards the upper end of the recent two-week range. Adding to the Fed’s pressure is that the US yield curve is moderating once more, alluding to an economic slowdown in the US.
  • EM currencies, including the ZAR, are taking direction from the USD. Should it extend its rally, they will succumb. However, if it continues to struggle to make back any more ground, it might also generate an inflection point. After all, emerging market currencies and the SARB were pre-emptive in their tightening and will arguably do more than the Fed reign in inflation. From both a carry perspective and valuations, EMs hold some attraction, and the ZAR’s show of resilience may still extend for a while. 

Nicholas Kabaso

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