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Zambia expects to reach full agreement with IMF in the middle of 2022

January 24, 2022by Nicholas Kabaso
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Local Market Commentary

  • Finance Minister Situmbeko Musokotwane on Friday said that he expects the country to reach a full agreement with the International Monetary Fund (IMF) in the middle of this year after reaching a staff-level agreement for a $1.4bn support plan in December. According to Musokotwane, “we are well on the way of solving this issue of unsustainable debt. We expect full agreement with the IMF sometime in the middle of 2022.” The positive rhetoric from the finance minister is likely to underpin investor sentiment towards Zambia further as bets grow that the new government will secure a bailout deal with the IMF and negotiate a debt restructuring.
  • On the global front, the U.S State Department told diplomats’ family members to leave the Ukraine as the superpower assesses options with the increase of America’s military assets in the region certainly not off the cards to counter the increase in Russian troops. Moscow has amassed some 100 000 troops over the past couple of months on the Eastern border it shares with the Ukraine, but the Kremlin has consistently denied that is planning to invade.
  • Industrial metals shed more ground this morning as risk-off sentiment builds given the rise in geopolitical tensions. The benchmark 3m LME copper price is currently marked at just below the $9870.00/oz mark and there is a potential that we slip further through the course of today’s trading session. Equally there is the hawkish Fed looming and investors may find the long side of the trade difficult as a tightening of monetary policy by the Fed would certainly but the brakes on economic dynamism and thus demand for copper.
  • On the news front, Reuters reported the following late Friday, London Metal Exchange (LME) Chief Executive Matt Chamberlain will step down in April, the exchange said on Friday, in a surprise move after five years at the helm of the world’s largest market for industrial metals. Chamberlain, a former banker who has been at the LME for nine years, has taken the top job at digital asset custody services provider Komainu, his new employer said. Komainu, launched in 2020, is a joint venture between Japanese bank Nomura Holding, digital asset security firm  Ledger and digital asset investment house  CoinShares. It safeguards about $5 billion in bitcoins and other cryptocurrency assets on behalf of financial institutions
  • In the local FX market, the bearish bias seen on the  Zambian Kwacha last week is likely to persist this week as demand for hard currency remains higher than actual inflows. 
  • Meanwhile, we have seen an element of risk off creep into the market as the Asian session draws to a close. All eyes are on next week’s Fed rate decision and many investors have decided to take some money off the table on what has been a good run for riskier assets.  Wall Street suffered a sharp sell-off in the final hours of trade yesterday and it seems that the investment community is preferring the safety of the fence for now.

Rand and International FX Commentary

  • Last week closed out a third consecutive week of ZAR appreciation, with key technical trend support now on the radar. A break of 14.9500 opens the door for a much larger move lower as it signals the reversal of a trend that began in June 2021. Conservative monetary policy has been rewarded, and it would appear that the SARB retains its status as a prudent central bank. This week investors will focus on the SARB’s MPC decision, where it is expected to hike rates 25bp and issue a more hawkish assessment of the inflation outlook.
  • Last week’s inflation data came as a bit of a shock as it beat expectations to the topside and raised the probability that the SARB would hike 25bp and add a more hawkish tone to their guidance. The SARB has previously warned of the risks to inflation and that pre-emptive action was needed to contain second-round inflation effects and raise the repo rate to more sustainable levels.
  • The SARB outcome will be announced the day after the Fed is due to announce its decision. Here too, the Fed will confirm a more hawkish turn, with a more rapid taper to conclude by March together with a possible 25bp rate hike. As important as it is to contain inflation expectations, the SARB will not want to fall behind the global rates cycle for fear that it may induce further volatility in the ZAR and exacerbate price instability. A hike by the Fed, attached to a more hawkish statement, will almost certainly translate into the SARB doing the same or more.
  • The SARB may not have QE to taper and then unwind, and it may not have to face the prospect of a major asset price correction in the way that the Fed does, but it will not escape the disruptive forces that the Fed might unleash. Major corrections in stock markets could see riskier investment destinations and emerging market currencies experience high degrees of volatility, and the SARB will want to pre-empt that and offer the ZAR some support. Over the longer term, less currency volatility, even if at the expense of higher rates, is preferable. At the start of the week, the ZAR will remain supported, but consolidate ahead of the MPC decision.

Nicholas Kabaso

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