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Local Market Commentary
- Some more news for Zambian bulls to cheers about broke over the weekend. On Friday evening, S&P raised Zambia’s longer-term local currency sovereign credit rating to CCC+ from CCC. Meanwhile, the short-term local currency rating was affirmed at C. S&P said in its credit rating update that the outlook on the rating is stable, stating that the credit rating balances expectations of improvements in the government’s fiscal position of the next 12 months against its large debt pile and the risk the local currency debt could be included in a potential restructuring. However, S&P said that this is not their base case forecast.
- S&P said that Zambia’s foreign currency credit rating remained at SD. Recall that the Zambian government defaulted on its foreign currency debt obligation in October 2020. Looking ahead, the agency said that it could raise the foreign currency ratings out of SD upon the completion of Zambia’s debt restructuring plan. S&P noted that its ratings following a debt restructuring tend to be between CCC or low B, depending on the country’s new debt structure and capacity to support its debt.
- That said, the agency could lower Zambia’s local currency rating should the government signal that it is including its local debt as part of its broader debt restructuring program or should its liquidity position deteriorate. This would be a function of the country running greater fiscal deficits than forecast by S&P. While downside risks remain, the rating upgrade is encouraging. Friday’s sovereign credit rating upgrade was underpinned by S&P’s assessment that risks to domestic debt repayment have fallen notably since the new government deployed a raft of structural reforms aimed at strengthening the country’s fiscal position and performance of the economy.
- Another factor contributing to the credit rating upgrade was the fact that the government had reached a staff-level agreement with the International Monetary Fund at the end of last year on a three-year arrangement under the Extended Credit Facility worth around $1.4bn. S&P said in its statement that this should provide a policy anchor for reforms over the next three years. Note that the program still requires the final stamp of approval from the board and that the international lender will only disburse funds if the country’s debt is viewed as sustainable. Going forward, although fiscal risks in Zambia remain elevated compared to most other African nations, the developments since the new government came into office have been very positive. Therefore, we remain bullish on Zambian assets over the next 12 months.
- In the base metals market, copper is flat this morning after closing 0.27% up on Friday. The red metal remains focused on the economic backdrop which for now is threatened in the short term due to higher rates and the threat of conflict in Eastern Europe.
- Shifting to the FX market, the Zambian Kwacha may come under some slight selling pressure next week as offshore inflows from this week’s bond auction dry up.
- The U.S. starts the week lethargically as it enjoys a long weekend. Nonetheless, much of the focus will rest on President Biden and his diplomatic efforts as he agrees to meet with Russian President Putin on the condition that he has not invaded Ukraine. Although it is unclear what breakthrough the two could engineer, it will be seen as mildly encouraging that all diplomatic efforts have not yet been fully exhausted. This may take some of the edge of expectations of war and help stabilise global financial markets that have priced in higher degrees of risk aversion.
- The USD finds itself on the defensive at the moment. News that diplomatic efforts between the U.S. and Russia could kick off this week shows that war is perhaps not imminent and that there was still room for some diplomacy and a political solution. Immediately, the safe-haven bid has lost support, and the USD has come under pressure. Stock indices are mildly higher, and this will help EM currencies hold their own against the USD.
Rand and International FX Commentary
- We start the new week in much the same way as the last one ended, with the world still firmly focused on developments in Ukraine and trying to work out the real risk of war. Investors chose to lock in some profits from any pre-existing short USD positions into the weekend, where so much was possible. This morning, we woke up to the news that US President Biden has agreed to meet with Russian President Putin on the condition that Russia has not yet invaded Ukraine.
- This is the first sign that diplomacy is still on the table and that Russia’s invasion is not yet a foregone conclusion. Most investors remain sceptical of Russia’s moves, but it has led to the gold price nudging a little lower off its highs, which at the margin will prevent the ZAR from appreciating significantly further vs the USD. In a counter-intuitive way, the ZAR has appreciated on any news of trouble so long as the gold price rose. It is unclear whether gold will resume its bull run.
- Domestically, this will also be an important week in that the Budget will be released, and investors will learn the degree to which the SA government will commit to reforms and can change the general trajectory of the economy. A lot can be done, but the political will to take some of the more challenging, less popular decisions has been lacking in recent years.
- So it’s a week that holds much promise but with an equal dose of uncertainty. While the ZAR technically still has the potential to drift stronger and sustain a break below the 15.00 handle, there is unlikely to be much directional momentum to speak of in the run-up to the budget and all it may bring. Barring any dramatic news out of Ukraine, the start of this week will likely be a fairly consolidatory one.