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Zambia Market Watch – Fitch says Zambia’s IMF staff-level agreement is a key step to debt restructuring

December 21, 2021by Nicholas Kabaso
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Local Market Commentary

  • In further positive news for Zambia, global ratings agency Fitch has indicated that Zambia’s IMF staff-level agreement is a key step to debt restructuring. Moreover, Fitch views the shift in government’s focus to debt sustainability and macroeconomic stability under the new administration led by President Hichilema as credit. That said, the agency said that they would only look to move Zambia’s Long-Term Foreign-Currency Issuer Default Rating out of ‘R.D.’ once a debt exchange is agreed and relations are normalised with international creditors. Zambia’s default was the result of long-term fiscal trends and several years of external debt accumulation. According to the agency, weaknesses in public financial management are likely to remain despite signs of willingness to undertake fiscal reform.
  • Yesterday’s announcement by the Chinese regarding the cutting of rates and a weaker dollar have supported the price of copper this week but we have Omicron fears capping gains. The 3m LME copper contract is currently up by 0.35% on the day changing hands at $9480.00/oz ahead of the EU open.
  • Pulling back the lens, issues of future supply are front and centre for copper at the moment. There has been no breakthrough in terms of the blockade which has shut the Las Bamnbas copper mine. Reuters reported late yesterday – A Peruvian community blocking a road used by MMG Ltd’s Las Bambas copper mine will again not participate in a government-brokered meeting to be held on Tuesday, a representative said. “We’ve reached a dead end,” said Victor Villa, a legal adviser for residents of Chumbivilcas, whose blockade forced Las Bambas to suspend production last week.
  • Wall St has had three significant developments to deal with. The first has been the emergence of the Covid-19 Omicron variant and the anxiety it is causing as more countries worldwide start to implement restrictions and, or worse, lockdowns. The second has been the Fed’s more hawkish stance and the expectation that monetary tightening next year will detract from GDP growth. The third and final development has been the failure of the Democrats to garner enough support to pass President Biden’s “Build Back Better” bill with Joe Manchin standing in the way of the Democrats securing a simple majority. Therefore, Wall St stocks have come under some pressure on renewed concerns over return prospects in the coming years, given just how much growth and recovery has already been priced in.
  • Concerning the spending bill, Democrat Joe Manchin has been clear that talks broke down due to negotiations failing on account of White House staff. Manchin has drawn tremendous criticism from his fellow Democrats that consider his behaviour inconsistent with his party’s values. Manchin, for his part, persists with the view that he is simply being fiscally prudent and ensuring that future generations are not saddled with higher debt burdens without the requisite improvement in conditions.
  • Ahead of Christmas, the child-tax credit expires, The last payment was made on Dec the 15th. Advocates argue that the credits help many out of poverty and that removing the tax credit now risks much hardship. Republicans have stood firmly against persisting with this programme not only because of the impact on the fiscus but also because it could pose an inflation risk as well.
  • Shifting to the FX markets, the Zambian Kwacha extended its journey north of the 16.400 mark as it remained under pressure amid higher importer dollar demand. Meanwhile, there really is not much in the way of directional momentum to speak of. The trade weighted USD continues to trade in a tight range and with nothing in the way of data scheduled for today, that is unlikely to change. One eye will turn to the developments around Omicron and the kind of international response that follows. That could have an impact on broader market sentiment and risk aversion, but for the most part, earnings results from companies have been good and justify high valuations. For now, the USD looks set to end the year in more consolidative fashion.

Rand and International FX Commentary

  • Omicron is spreading rapidly through both vaccinated and unvaccinated people. Those who had caught Covid before and recovered, and those that haven’t. It is causing anxiety in Europe, and the Netherlands have gone into full lockdown for a month. Other countries are considering the same, with the Omicron variant rapidly becoming the dominant variant ripping through the global population. As a result, stock markets have corrected lower, and the VIX is trading at more elevated levels. 
  • But for all the rise in risk aversion, the USD has not surged significantly stronger, and the VIX is elevated but not surging. In turn, emerging markets have not sold off and have even staged a recovery in many instances. At face value, it seems counter-intuitive. However, closer inspection reveals that countries adopting a more conservative monetary policy approach are also those whose currencies have performed a little better. 
  • As we enter the silly season where thinner liquidity conditions will dominate, one needs to be very careful in position-taking. Thinner liquidity can exaggerate market reactions that might ordinarily be innocuous. Unless there is a big event, most investors will not want to participate in pushing through any significant orders, and the safest place to be will be the sidelines. Omicron may appear to be a market driver and has captured the headlines. But, market reaction has been limited, partly because it has been known for a few weeks now and partly because it is neither the first mutation nor the first wave. Furthermore, reports from South Africa and even the WHO show that this variant causes much milder disease. 
  • So as we complete the final full trading week of the year, the turbulent crosscurrents in the sea of uncertainty appear to be cancelling themselves out and leaving investors a little uncertain on how best to proceed. Letting the dust settle and waiting for more detail concerning Omicron and what actions governments might take appears to be the safest thing to do. It also implies the potential for a more consolidative end to the year. That being said, the USD-ZAR is not far off testing the prior low towards 15,6600, which would pave the way for more ZAR appreciation if broken. For now, that looks unlikely as we trade back towards 15.8000.

Nicholas Kabaso

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