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Zambia aims to conclude talks with the IMF by June

February 11, 2022by Nicholas Kabaso
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Local Market Commentary

  • Zambian bonds have performed relatively well this year when considering the deterioration in external conditions amid the hawkish shift from major developed market central banks. The combination of high international copper prices, which is boosting fiscal revenue, and the shift in policy under the new government is providing support for domestic bonds. Adding to the bullish impetus has been growing expectations that the government will finally seal the deal with the International Monetary Fund for a much-needed bailout program.
  • Recall that the IMF agreed at a staff level for a new program under for an Extended Credit Facility for 2022-2025 late last year. The new program aims to help restore macroeconomic stability and provide the foundation for an inclusive economic recovery. In a statement released last year, the international lender said the facility would be in the region of SDR 980mn or $1.4bn. Moreover, the IMF said that the agreement is based on the government’s plans to undertake bold and ambitious economic reforms. 
  • Zambian bonds have staged a marked rebound on the back of expectations that the IMF will indeed secure a deal with the IMF. This comes on the back of the shift in policy from the new government. Going forward, while we expect a significant premium to remain baked into Zambian bonds given the default at the end of 2020, we still see value in holding Zambian bonds over the medium term.
  • In the local FX market, despite next week’s treasury bond auction, the ZMW is expected to remain under pressure as corporate demand continues to grow on the back of improving economic activity amid tight hard currency supply.
  • Moving over to the US, headline inflation jumped by more than expected to 7.5% y/y while core inflation rose to 6.0% y/y. It is the highest inflation reading forty years and prompted speculation that the Fed may hike rates by 50bp in March. The rise of such speculation is to be expected. Still, it is probably not realistic when one considers that this inflation print might also signal that the worst is now behind us and that inflation will likely decelerate sharply in the coming months. Money supply growth has moderated sharply and will reduce the amount of monetary space that inflation has to take hold.
  • The yield curve has flattened in response as investors position for a stronger Fed response. The Fed will not welcome such flattening that will not want expectations turning back in favour of an economic downturn. A lot is riding on asset prices remaining buoyant. A major correction in equity markets could set in motion a sharp moderation in the credit cycle and, therefore, growth.
  • Predictably, the USD has found some support following the higher than expected CPI print as investors position for a quicker rise in interest rates than was first anticipated. As US Treasury yields rise, so the USD will again benefit from the monetary policy divergence with its trading partners that will keep the USD well bid. This could prove to be the catalyst for a more bullish week ahead for the USD.

Rand and International FX Commentary

  • Notwithstanding a USD that remained well bid, the ZAR still made a strong recovery to trade back below the 15.000 handle briefly. The move was not sustained, but the fact that it happened into the teeth of a well bid USD makes the move even more remarkable. Furthermore, this was not related to the State of the Nation Address as the bulk of the bullish move happened before the President even began speaking and searching for a clear-cut catalyst will be difficult.
  • After all, stock markets were less bullish, the VIX jumped off yesterday’s lows, and the USD is stronger. The only factor one could attribute to the move in the ZAR has been the rise in commodity prices, and while they did retreat off their highs, they remain extremely buoyant and well supported. While oil prices are stalling, this will contribute towards restoring SA’s terms of trade. 
  • Then there is SA’s high ranking on carry attractiveness. Not only are yields attractive, but the volatility associated with the ZAR is lower, the current account deep in surplus and the country’s terms of trade supportive. Add to that the anticipated rate hikes that will at the very least keep pace with its more developed trading partners, and there is some underlying resilience to the ZAR. Finally, it is worth noting that SA now enjoys a much lower inflation rate than the US, and from a pure PPP perspective, deserves to enjoy some resilience.
  • Finally, within the SONA, there was nothing that might’ve translated into any material concerns. If anything, President Ramaphosa alluded to greater inclusion of the private sector in alleviating some of the country’s infrastructural shortfalls, which in itself speaks to reforms. This was also one of the last big risk events for a while before focus turns more squarely to the budget scheduled for release later this month. Intra-week, the ZAR has done enough now and is likely to experience a mini-correction weaker as the USD recovers. 

Nicholas Kabaso

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