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Local Market Commentary
- The United Nations (UN), in a report, has said that the continent-wide free-trade pact could help boost economic growth and reduce inequality in Africa as the coronavirus omicron variant threatens to weigh on output. According to the UN, commerce under the African Continental Free-Trade Area could reduce coronavirus-induced economic contractions and “spur sustainable and inclusive growth on the continent if stronger support measures targeting women, young traders, and small businesses are implemented.” The UN added that the bloc has a potential market of 1.3bn people with a combined GDP of $3.4trn and could be the world’s biggest free-trade zone by area when the treaty becomes fully operational by 2030. The UN further said that “if the opportunity can be adequately tapped and the potential through the AfCFTA realized, countries can build greater resilience to the impact of economic shocks and foster deeper cooperation on regional trade.” The free-trade pact could bolster intra-African trade exports to 43% of its total from 14.4%, and a further $9.2bn of export potential could be realized through partial tariff liberalization under the AfCFTA over the next five years.
- Ratings agency Moody’s yesterday said that the International Monetary Fund Staff-level agreement with Zambia paves ways for debt restructuring and engagement with creditors. Last Friday, the IMF said that it had reached a staff-level agreement with the Zambian government on a new arrangement under the Extended Credit Facility for 2022-2025 to help restore macroeconomic stability and provide the foundation for an inclusive economic recovery. The IMF added that the program could be supported by an arrangement under the Extended Credit Facility in the region of SDR 980mn or $1.4bn.
- The copper markets yesterday focused on the Chinese stimulus plans coupled with the news that Pfizer stated its three-shot course of its vaccine would neutralise the Omicron variant. The benchmark 3m contract closed 0.6% higher on the day at $9652.50/tonne keeping the year to date gains for the metal north of the 20% mark.
- Today the bears have managed to gain a foothold. The red metal has fallen just shy of 0.4% in Asia following data showing that Chinese car sales declined for the 6th straight month in November. Car sales is often used as a leading indicator for economic activity, and copper is a key component in the manufacture of vehicles.
- Moving over to the US, the most important data set today will be the initial jobless claims data that will offer further perspective and insight into the state of the labour market. All labour market data sets point to a strong recovery, and the weekly jobless claims data is no exception. Again, the jobless claims numbers are expected to remain subdued and may even dip below 220 if consensus expectations are anything to go by. Similarly, continuing claims are set to moderate further to around 1.9mn to continue the steady moderation in the claims data. Read against the backdrop of the latest JOLTS data released yesterday, which showed that layoffs had declined further and that job openings, had risen to 11mn. The prospects for a continued recovery and drop in the unemployment rate look good.
- Also of some interest, although second-tier in importance, will be the wholesale inventories data for Oct. Since Dec 2020, wholesale inventories have steadily increased as the manufacturing sector, and wholesalers steadily gear up for solid consumption demand and an easing in logistical supply constraints. For now, this remains a contributor to growth and should be looked at together with the strengthening labour market and solid retail sales data that alluded to improved demand conditions.
- Finally, on the geopolitical front, President Biden has had communication with Russia’s President Putin, and the result appears to be a de-escalation of tensions on Ukraine’s border. The U.S. has indicated that it would not be sending troops to the Ukraine border and will have a discussion with Ukraine’s president. For now, the prospects have improved, which will help bolster risk appetite at the margin, not only because of those specific geopolitical tensions but also due to the ramifications of Russia’s relations with the rest of Europe.
- In the FX markets, the Zambia Kwacha extended gains to a third straight session yesterday, as the local unit continued to be supported by positive developments relating to the program with the IMF. Meanwhile, yesterday’s s trading action was not unexpected and needs to be looked at against the backdrop of improving risk appetite. Although the USD’s strength can to some degree be justified by monetary policy differentials with the U.S.’s main trading partners, there has been much of that already priced in. Fundamentally speaking, the USD is at least fully priced if not slightly expensive. A decline in risk aversion would elevate the probability that the USD could correct lower, not to establish a trend but rather to generate a healthy correction.
Rand and International FX Commentary
- Depreciation of the trade-weighted USD, coupled with a surge in commodity prices, has translated into a further appreciation of the ZAR without much in the way of significantly positive news for SA to justify it. While one could argue that the early reports and data on the Omicron variant are encouraging in that they reflect only mild symptoms for infected people, an IMF report on SA is a wake-up call to policymakers to focus on reforms and fiscal prudence if growth and employment are ever to be achieved.
- The powerful message to the government, was not to waste the opportunity that high commodity prices and benign global financing conditions have generated. The IMF warns that both these supporting factors of the SA economy are cyclical and, therefore, temporary. They have also done very little to assist in tackling unemployment, with the reasons for the joblessness being more structural in nature and reflected in reductions in investment and productivity. THEREFORE, the IMF has joined calls for the government to implement hard-hitting reforms, shrink the role of the government in the economy by removing existing regulatory barriers to the private sector, and to rid itself of maladministered and badly functioning SOEs. What SOEs are supported must be done with reforms that have a chance of succeeding while key network industries of electricity, telecommunications and transportation must be liberalised.
- The IMF added that greater flexibility was needed in the labour market, in what will likely prove to be a contentious issue for the trade unions. Furthermore, imposing a debt anchor and debt ceiling to de-politicise deficit spending and hold finance ministers accountable for not adhering to fiscal rules would be a step towards real fiscal consolidation. Finally, the IMF added to the SARB’s calls that SA should consider a lower inflation target.
- If all these reforms were genuinely attempted, SA would likely find its support from the private sector. The economy would be rendered more dynamic, and there would be a much greater chance of tackling joblessness. These are all factors that ETM Analytics has alluded to for years and strongly believes that they are possible with strong leadership and a credible implementation strategy.
- Government’s success or failure in such implementation will dictate how the economy and the ZAR perform over the longer term. In the short term, it is about the USD, Omicron, commodity prices and overextended USD bullish market positioning that still needs to fully unwind. The ZAR still holds the potential to appreciate further ahead of the weekend.