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Zambia Market Watch – Debt resolution optimism underpins Zambia’s Eurobonds

August 25, 2021by Nicholas Kabaso

Good Morning from the Global Markets Desk.

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Local Market Commentary

  • 3m LME Copper continued to make back lost ground yesterday adding another 1.1% to the topside closing at $9376/tonne, this comes af-ter heavy losses last week saw the red metal take a look below the $9000/tonne mark. Markets are treading cautiously with the specula-tive element relegated to the sidelines ahead of this weekend’s Jackson Hole symposium. The Fed Chairman Jerome Powell is due to speak on Friday and markets will be hanging onto his every word for indications of the timing of the taper.
  • Zambian Eurobond yields have plunged in recent sessions following the landslide victory of Hakainde Hichilema in the presidential elec-tion, which has prompted a wave of optimism that Hichilema can resolve the debt crisis and put the country back on a sustainable debt path. Markets are also betting that the newly elected President Hichilema will be able to secure a much-needed deal with the Interna-tional Monetary Fund while at the same time reviving the crippled economy that has been weighed down by fiscal challenges, unpredict-able international commodity prices and COVID-19.
  • Since its recent peak on July 22, Zambia’s 2027 Eurobond yield has shed almost 590bps to close the session just north of the 14.00% mark on Tuesday, its lowest level in more than two years. Notwithstanding the sharp rally in Zambia’s 2027 Eurobond over the past four weeks, Zambia’s 2027 Eurobond yield continues to trade well above its regional counterparts. For context, the comparable Eurobond yields in Kenya, Ghana, Nigeria, and South Africa are trading at 5.07%, 7.04%, 5.62%, and 2.88%, respectively.
  • Zambia’s elevated Eurobond yield is reflective of just how severe the country’s fiscal challenges are. Recall that the country defaulted on a Eurobond interest payment at the backend of last year, making it the first African country to default in the COVID-19 era. Looking ahead, while we advise investors to maintain a cautious stance when investing in Zambia, there is an opportunity to extract some significant al-pha, especially if the newly elected Hichilema delivers on his promises and the country is able to secure a program with the IMF.
  • Speaking at his inauguration on Tuesday, President Hichilema pledged to tackle Zambia’s unsustainable debt, lamenting that the national budget was overwhelmed by the cost of servicing it. The President said, “our focus over the next five years will be restoring macroeco-nomic stability,” adding that “we will pay special attention to lowering the fiscal deficit, reducing public debt, and restoring market confi-dence in our country.” According to Bloomberg data, of Zambia’s $12.0bn external debt, around $3.0bn is made up of Eurobonds, $3.5bn is bilateral debt, $2.1bn is owed to multilateral lending agencies, including the IMF, and $2.9bn in loans from commercial banks. A quarter of the total is held by either China or Chinese entities via deals shrouded in secrecy clauses. This is expected to be the biggest hurdle for Zambia to overcome in its negotiations with the IMF to secure a bailout program.
  • Moving over to the US, Democrats appear to have arrived at an internal compromise that will allow them all to push for the Biden admin-istration’s domestic agenda. It revolves around the social spending plan, which is being touted as a hallmark of Biden’s legacy. The $3.5trln total will unlikely be met as more compromises will be needed to ensure safe passage. Guesstimates place the amount that will be fund-ed through extra taxation at around $1.0trln, which means that there would still be a significant impact on the fiscus if the ultimate deal settles at around $2.0trln. The aim would be to build a deeper and all-encompassing safety net for the U.S., but the proposal will meet with stiff opposition from the Republicans, who will baulk at the idea of lifting the tax burden even more. On the infrastructural spending, that is not only aimed at replacing an existing spending programme that is coming to an end but boosting it at the margin to further sup-port the economy.
  • In the way of data, only durable goods orders will be released today that will have any bearing on changing market expectations. While the U.S. economic recovery remains solid, the rapid pace at which the Delta variant is spreading across the country has weighed on con-sumer sentiment and, in turn, is expected to dampen demand for durable goods. Consensus expectations suggest that durable goods or-ders decreased by -0.3% in July, with businesses and consumers sensing that the Delta variant means the pandemic is far from over. Looking ahead, while businesses and consumers are expected to have turned more cautious in their spending, we expect the solid pace of recovery in the U.S. economy to persist in the months ahead.
  • Not much change to the USD’s performance that consolidated yesterday’s retreat. Many investors are scaling back their expectations for hawkish guidance from the Fed and sitting on the side lines until some guidance is offered. It may in other words, be too soon for a signif-icant shift in U.S. policy.  With Asian equity markets again in the green and expected to remain that way, the short-term outlook for the USD is more bearish than consolidative. Technically, the USD appears to be fairly non-committal.

Rand and International FX Commentary

  • Both major and emerging market currencies strengthened across the board yesterday as the US dollar remained on a downwards trajec-tory following its rise to 9-½-month highs last week. The ZAR strengthened close to 1% by the end of London trading hours, bringing it within range to test the 15.0000/$-handle in intraday trade yesterday. 
  • While risk appetite has improved at the start of the new week, helping the ZAR trim some of its August losses, second-quarter economic data released yesterday painted a far less rosy domestic outlook. The arrival of the third wave of COVID-19 infections and resulting re-strictions saw the SARB’s leading indicator slip from a record high of 128.8 to 125.8 in June. According to the SARB, the decline was the most pronounced since May 2020 and thus suggests that base effects and the positive effects from economic normalisation have started to dissipate. The trend will likely continue in the July and August releases, given the subsequent civil unrest. Still, the data is already show-ing signs that the pace of recovery may be stalling.
  • With this implying potential trouble further down the line for SA’s growth prospects, the Quarterly Labour Force Survey released yester-day did little to brighten the domestic picture. South Africa’s unemployment rate rose to a fresh record high of 34.4% in Q2 from 32.6% in the previous quarter. While this is partly attributed to the easing of virus restrictions increasing the labour force participation rate as more people began to seek employment, it is evident that the current business climate was and likely still is unable to cater for the vast number of jobs seekers as the economy reopens. Meanwhile, the data reported by StatsSA also showed that the number of people employed fell in three of the ten industries tracked, which suggests that some sectors sustained further hardship despite the easing of restrictions. 
  • July’s civil unrest, which National Treasury estimates to have shaved off between 0.7-0.9 percentage points from 2021 growth, alongside tighter lockdown restrictions, means SA’s fragile economy remained under pressure into the start of H2. This brings the risk of even more job losses and weak hiring dynamics, shrinking the tax base and putting further pressure on government finances. Had it not been for surging commodity prices lifting mining profits and thus the government’s tax intake this year, SA’s fiscus may have been in a far more uncomfortable place than it is today. 
  • While ZAR shrugged off the data yesterday as markets remained significantly risk-on, a weak economic backdrop will come back to bite domestic assets. The SARB will ultimately be hard-pressed in hiking interest rates in the current environment. At the same time, weak consumer demand amid high unemployment will unlikely see inflation rising sufficiently in the near term to warrant rate hikes either. All the while the market gauges the likely end to extremely loose monetary policy in major DMs, which may commence with the US Fed re-ducing its monthly asset purchases. The Fed’s Jackson Hole symposium at the end of the week still holds much focus, although near term tapering bets have been reduced and the USD rally paused. The USD has, however, found some support overnight. As such, the ZAR has been unable to push past the 15.0000/$ key resistance level, which is may struggle to be broken should the improvement in global risk appetite not persist for the remainder of the week.

Nicholas Kabaso

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