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Local Market Commentary
- It is no secret that China has been a significant lender in Africa over the past decade, with the world’s second-largest economy lending bil-lions of dollars to governments across the continent to fund infrastructure projects, budget shortfalls, and more recently, COVID-19 relat-ed spending. While, in some instances, the lending has led to improved growth conditions and infrastructure advancements, a number of African countries have slipped into debt spirals on the back of Chinese loans.
- China has been blamed for irresponsible lending to African countries, with many claiming that China’s lending practices have led African countries into debt traps. China has said that these claims are false and has blamed Africa’s fiscal problem on several economic factors. Commenting on the matter, Vice-chairman of the China International Development Cooperation Agency Zhou Liujun said African nations’ debt problems are a historical issue resulting from rising protectionism and currency factors.
- Liujun said that “facts and data fully show that this accusation is purely politically driven,” adding that “its real intention is to drive a wedge between China and Africa’s friendly and cooperative relations.” Liujun reiterated that China thoroughly considered the debt condition of African nations and their repayment capabilities when offering loans. China has pleaded to strengthen cooperation and communication with different parties to help African countries to face their debt problems.
- While China has refuted claims that it has recklessly lent funds to African countries over the past decade and engineered debt traps across the continent, it is true that many Africa countries, particularly those that have borrowed from China, find themselves in positions of fiscal distress. Zambia is the first country to come to mind. Note that a large portion of the country’s debt is owed to Chinese lenders. Recall that Zambia was the first African country to default on its debt during the COVID-19 era.
- In conclusion, there are a number of factors to support both arguments. We believe that, whether intentionally or not, the massive wave of Chinese lending into Africa over the past decade has led to a significant deterioration in fiscal dynamics. Africa’s fiscal problems have been amplified by the COVID-19 pandemic, which has seen debt piles across the continent balloon. Given the fiscal degradation that has taken place over the past year, we advise traders to fully assess a country’s fiscal risks when investing in it. Frameworks such as ETM’s Af-rica fiscal Resilience Framework can assist in identifying these risks.
- One day up one day down seems to be the mantra for copper at the moment. The red metal closed 0.80% lower yesterday and the trend has continued this morning in the Asian session as investors assess the probability of lower economic growth out of China which will erode demand for the metal.
- Underpinning prices is the low inventories across the globe as well as the news that there are protests in Peru which threatens supplies. Protestors have blocked a road used by the Antamina copper and zinc mine demanding that the company honour commitments to the lo-cal area. This is another protest in a string of them.
- U.S. data released yesterday showed that the economic recovery remains afoot and intact and is likely to persist, despite all the risks re-lating to monetary policy normalisation, the pandemic and rising inflation. Consumer confidence perked up, home sales remained ex-tremely strong, and house prices continued to rise, albeit at a slower clip. Add to that the relatively strong earnings that have propelled the stock market to fresh record highs, and the outlook for the economy remains relatively strong.
- Ahead of the G20 meeting on Saturday, U.S. National Security Advisor to President Biden, Jack Sullivan, has indicated that Biden plans to re-engage with G20 allies on a range of matters, including the Iranian nuclear deal, energy prices and logistical supply-side constraints that are hampering the global economic recovery. Furthermore, he will seek to cement the progress made on the global minimum tax rate and will also seek to placate the green energy lobby ahead of COP 26 on Sunday.
- It is difficult to discern the exact drivers of the USD at the moment, but in the main, it appears to be perceived differences between the Fed’s tilt towards tightening and other central banks that may prefer to stay on hold. The ECB, for instance, will lag the U.S. with respect to its policy normalisation. While that may be true, much of this is known and should be priced in by now. Instead, some risk events loom, from central bank meetings, the G20 this weekend together with COP 26 and the Fed’s decision next week. The combination may very well keep the USD somewhat supported until the dust settles.
- As October draws closer to an end, it is worth taking stock of the performance of Southern Africa currencies on month-to-date perfor-mance. October so far has been a mixed bag with the South African Rand (ZAR) and Botswana Pula (BWP) in the green, while the Mozambiquan Metical (MZN) has been relatively unchanged, and the Zambian Kwacha (ZMW) has been on the back foot. The ZAR (+1.44%) has outperformed its peers and is on course to erase some of September’s losses. The resilience of the ZAR to domestic and offshore developments is largely due to buoyant commodity prices and a cycle that has bolstered SA’s trade account to record surpluses.
- On the other end of the spectrum, the ZMW has been the laggard in the region, down by -2.15%, making it the third-worst performing Af-rican currency. The ZMW weakness has been mainly attributable to tight FX liquidity conditions, with the demand for hard currency out-weighing supply. Despite the recent losses, the ZMW remains the best performing African currency on a year-to-date basis, up by 23.27%. The broader ZMW strength has been in part underpinned by improved FX reserve levels and prospects that Hichilema will rein in public debt and the budget deficit while restoring the nation’s credibility following a default on its foreign loans. Meanwhile, a positive real rate has in part supported the MZN, which is little-changed this month and is still the second-best performing African currency on a year-to-date basis.
Rand and International FX Commentary
- Emerging market currencies traded broadly in the green during the day yesterday, capitalising in part from a steadier US dollar which ini-tially struggled to maintain momentum from the prior day. However, the USD picked up steam in late afternoon trade as it received sup-port from rising short-dated US Treasury yields as well as a higher than expected reading for a gauge of US consumer confidence. Overall, positive market sentiment remained widespread yesterday, with major US equity benchmarks scaling record highs. As for the local cur-rency, however, the ZAR swung earlier gains to snap broader market dynamics and ultimately could not capitalise on the risk asset rally.
- With global markets moving in unison as they await a slew of central bank policy decisions this week to provide direction, the ZAR traded with a distinctive downwards bias as it led losses in the EM currency sample. However, notable upcoming risk events appear to be weigh-ing on the local currency, including next week’s municipal elections, while yesterday brought the official announcement that Finance Min-ister Enoch Godongwana’s maiden budget address will be delayed for the second time to November 11.
- With investors looking to the Medium Term Budget Policy Statement for guidance on government’s fiscal consolidation plans and the strategies it has eyed to reduce public debt, there will likely be additional questions on the funding of SOEs, specifically for state utility Eskom after it announced yesterday its funding requirements over the next 10 years for its transmission development utility plan. While this will aid SA’s future electricity reliability, given Eskom’s finances remain under pressure, these commitments are likely to land in gov-ernment books eventually and thus remain a burden on the fiscus and taxpayers.
- As for domestic data yesterday, the SARB’s leading indicator snapped a two-month decline as it registered an increase in August. Specifi-cally, the index increased from 127.0 in July to 127.9 as the government relaxed restrictions and civil unrest subsided. The largest positive contributors were accelerations in the number of new passenger vehicles sold and the growth rate of job advertisement space. Mean-while, the largest detractors were decreases in the average hours worked per factory worker in manufacturing and in the USD-denominated export commodity price index. This highlights how reopening-sensitive sectors drove the growth, while SA’s usual structur-al hindrances continued to detract from the growth outlook. Looking ahead, the leading index is likely to remain supported in the months ahead amid the further easing of restrictions. However, these lingering structural challenges and the uncertain path of the global recovery could partially offset this.
- In the spot markets, the ZAR has found its footing near the 14.8500/$ handle, trimming yesterday’s losses overnight as the USD’s late-afternoon rally has cooled in early morning trade. However, sentiment during the Asian session has turned somewhat, with Asian equity benchmarks failing to follow gains on Wall Street, suggesting the USD may remain supported should positive risk appetite fade. Domestic markets will be gearing up for a bumper data card into the end of the week, beginning with tomorrow’s producer price inflation statistics. Until then, currency direction will depend largely on upcoming central bank meetings, starting with the Bank of Canada later today.