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Local Market Commentary
- Zambian Eurobonds have staged a meaningful recovery in recent months amid hopes that the new government led by President Hakainde Hichilema will deliver the much-needed structural reforms to reignite growth and rein in the country’s ballooning debt pile. While the Hichilema administration has vowed to put the country back on a sustainable debt path with the government aiming to slash unnecessary ex-penditure and restructuring the country’s debt, Zambia’s fiscal metrics remain one of the worst in Africa with the debt-to-GDP ratio for in-stance buoyed well above the 100% mark.
- In recent months, Zambian Eurobonds have staged a meaningful recovery amid hopes that the new government led by President Hakainde Hichilema will deliver the much-needed structural reforms to reignite growth and rein in the country’s ballooning debt pile. While the Hichilema administration has vowed to put the country back on a sustainable debt path with the government aiming to slash unnecessary ex-penditure and restructuring the country’s debt, Zambia’s fiscal metrics remain one of the worst in Africa, with the debt-to-GDP ratio, for in-stance, buoyed well above the 100% mark.
- Recall that Zambia became the first African country to default on its debt during the COVID-19 era, with the government missing an interest payment at the end of last year. The default on the interest payment was for a $750mn Eurobond due to expire in 2022. The default, in addi-tion to the fact that the country is in a position of major fiscal distress, has resulted in a massive fiscal premium being priced into the front-end of Zambia’s Eurobond curve on account of the near-term fiscal risks.
- As such, Zambia’s Eurobond curve remains inverted, with shorter-dated bond yields trading above those of longer-dated bond yields. Note that an inverted yield curve is often an indicator of an impending recession, however in Zambia’s case, it also represents a combination of ele-vated inflation and the significant fiscal challenge that the country is faced with. For context, the spread between Zambia’s longer-dated 2027 Eurobond yield and the 2022 Eurobond yield is currently trading at around -2543bps versus -1850bps in mid-September.
- While the curve remains deeply inverted, it is worth pointing out that Zambia’s fiscal premium has declined significantly in recent months amid signs that there could be light at the end of the tunnel for Zambia under the new government. Specifically, the spread between Zambia’s 2027 Eurobond yield and the comparable US Treasury yield has narrowed by more than 1000bps since the start of the year to sit at around 1283bps.
- Looking ahead, although Zambian bonds remain a risky investment, we remain of the view that there is value to be found in Zambian bonds over the medium term. However, this is contingent on the government reversing the fiscal damage caused by the previous administration so that Zambia can firm up a much-needed program with the International Monetary Fund and possibly restructure its debts.
- Undoubtedly, the main event this week will be the Bank of Zambia policy rate meeting. Denny Kalyalya on Wednesday chairs his first MPC meeting since being reappointed governor of the BoZ. Last year, he was unexpectedly fired by former President Edgar Lungu, raising ques-tions about the bank’s independence. Risks for a rate cut exist given the local currency’s appreciation and the need to create impulse within the private sector to drive an economic rebound. That said, an imminent economic program deal with the International Monetary Fund could see Zambia increasing fuel pump and electricity prices, which may add to inflationary pressures and convince Kalyalya’s committee to keep rates steady.
- The U.S. on Friday signalled its intent to revitalize its long-neglected relations with Africa, where it has steadily been losing influence to China and other global powers. In a speech, Secretary of State Antony Blinked said that “too many times, the countries of Africa have been treated as junior partners or worse rather than equal ones. We want to make your partnerships with us even stronger.” Africa has always been near the bottom of the U.S. foreign-relations priority list, with the world’s poorest continent accounting for less than 2% of its total two-way trade. Blinken also announced that Biden intends to host a summit of African leaders to increase engagement and foster closer cooperation.
- Base metal prices finished the week on a better footing with the copper price adding just over 2% on the session while aluminium and zinc finished around 2.4% stronger.
- This morning we have the global bellwether for economic growth namely copper on the backfoot with investors concerned about the rising coronavirus restrictions hitting the EU and the potential for quicker tightening of monetary policy by the likes of the Fed which would reduce the amount of dollar liquidity in the market tempering growth expectations.
- Moving over to the US, although it will be a very quiet start to the week concerning data, that will change from tomorrow, with Wednesday particularly jam-packed with data as the U.S. prepared for their annual Thanksgiving long weekend. This could hold implications for the USD and how financial markets around the globe will perform and trade. Although the week may enjoy a flourish on Wed, it should quieten down considerably on Thu and Fri, with all eyes on the strength of Black Friday sales as a gauge of just how strongly the U.S. economy is recovering.
- On that point, more support for the economy will come from the Federal government if it succeeds in passing the $1.75trln social spending bill through the Senate just as it did through the House of Representatives. The Democrats will have a tougher time muscling their bill through the Senate, with many expressing concern over the sheer size of the spending bill and its impact on raising the budget deficit through the years ahead. This will be something to watch out for through the next two weeks, with the Biden administration hoping for another political victory before the end of the year.
- In the FX markets, the Kwacha weakness seen last week is expected to persist this week amid limited hard currency supply. Last week was a good week for the USD and this week appears to be starting much as it left off. A combination of strong data, the prospect of a Fed that might tighten sooner than expected and a resurgent Covid wave in Europe is all that was required to drive the USD stronger. Commodity prices are on the defensive as a result, and investors appear to be defaulting back to the safety of the USD ahead of the upcoming Thanksgiving long weekend which will cause some level of cautiousness.
Rand and International FX Commentary
- ZAR bearishness persisted throughout much of last week, and it appears to have started this week in much the same fashion. The ZAR is under considerable pressure, and the lack of rating guidance on Friday evening has done little to help. Both Moody’s and S&P left their rating unchanged, with neither agency offering any further guidance. S&P has indicated that in instances where their review determines that key rating factors have not changed, they do not release a review.
- That implies that the rating agencies saw the recent budget as more of an update and that the ultimate test for the finance ministry will be in the final implementation of the reforms. If one were generous, one could even argue that the MPTBPS may have stalled any further slide in ratings, but again, such a pause would only be temporary unless it was backed up by action. In other words, the rating agencies want to see action before they change the ratings. Moody’s, in particular, has a negative outlook implying that the next rating action could be a downgrade and would need to move back to a neutral outlook before one could convincingly argue that it has given the government the benefit of the doubt.
- Internationally, the USD remains firmly on the front foot. It has consolidated last week’s gains, with the stronger US data, coupled with expectations of widening monetary policy disparity between the US and its major trading partners still driving direction for now, as the US economic recovery appears more robust. Commodity prices appear to be on the slide and heading back towards early October lows, all of which will count against commodity currencies as their terms of trade deteriorate. It is also important to keep one eye on geopolitical developments between Russia, Ukraine and the rest of the EU while fresh lockdown and Covid protests have kicked off in Europe. These are all developments that could lead to a rise in risk aversion.
- Domestically the news for the ZAR is not much better. Coming off a week where revelations of sabotage on Eskom came to the fore, focus this week will turn to the fragile coalition talks that do not appear to be generating much in the way of sustainable progress. With little more other than the second tier domestic PPI, leading indicator and business confidence data scheduled for release, much of the ZAR’s direction will likely come from abroad. For the time being, that appears skewed against the ZAR