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Local Market Commentary
- Fiscal hawks in Zambia can take a deep breath now that the government has secured a staff level agreement for a new program with the International Monetary Fund. In a statement published on 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 said in its statement that the program could be supported by an arrangement under the Extended Credit Facility in the region of SDR 980mn or $1.4bn. The international lender noted that the agreement is based on the government’s plans to undertake bold and ambitious economic reforms. The staff-level agreement is subject to IMF management and executive board approval and receipt of the necessary financing assurances. Further details on the agreement will be released today.
- Commenting on the IMF deal, Finance Minister Situmbeko Musokotwane said the IMF programme will provide much-needed fiscal space to Zambia and anchor its domestic economic programme, which is based on four pillars: economic transformation and job creation, human and social development, environmental sustainability and good governance.
- From a financial market perspective, while the IMF program still needs to be signed off by the board, investors will take comfort in the fact that the government has made significant progress towards securing a program with the IMF. Zambian Eurobonds reacted positively to the news on Friday with the 2022 Eurobond yield for instance falling 277bps on Friday to close the session at 42.89%, according to Bloomberg data. As mentioned in previous commentary, although Zambian bonds remain a risky investment, we are of the view that there is still some great alpha to be extracted over the short to medium term as the government continues to deliver on its election promises.
- Moving over to copper, the benchmark 3m LME copper contract has recovered about half of its 0.8% loss on Friday during the Asian session as investors fear supply constraints as MMG Ltd will shut down production at its Las Bambas copper mine in Peru. The decision to close the mine by mid-December came as a result of a road blockade where locals block the road which the mine uses to get its produce to port stating environmental concerns. Reuters reported that executives urged the government to build a freight rail link to avoid future disruption. “The freight rail has huge social acceptance,” Carlos Castro, Las Bambas head of corporate affairs, said in an interview with Reuters.
- Taking a glance at global FX markets this morning we see the dollar on the front foot with the USD Index knocking at the door of the 96.30 mark. It’s really been a case of the market experiencing a flight to safety and risk off as investors assess the broader impact of the Omicron variant on global trade and economic dynamism. This is likely to filter through to the local open which suggests a cautious start to the week
Rand and International FX Commentary
- Last week’s US data painted a picture of an economy that continues to improve and a tightening labour market. Another drop in the unemployment rate against a backdrop of solid corroborating labour data last week gave the USD a lift and assisted the USD-ZAR higher. However, as strong as the USD reaction was, it was not sustained, and this morning the USD-ZAR finds itself on the defensive, with SA receiving some good news of its own.
- According to official government sources and the health minister Joe Phaahla, Covid 19 (Omicron), infections may be dominant and spreading rapidly, but the illness so far has been mild, and hospitalisations have not risen as they did in previous waves. This is excellent news as the authorities have no reason to impose harsh restrictions on infections alone. The logic previously was always to protect the healthcare system as much as possible. This is unnecessary for now and implies that the festive season might still unfold with domestic tourism demand still largely intact.
- There have also been countless research notes written describing how this may also signal the beginning or the end of the pandemic. If the virulence of the virus has subsided to the point where the population can co-exist, it becomes endemic and no longer a pandemic. It implies that normal social behaviour can resume and that global economic recovery can be allowed to unfold whether the world is fully vaccinated or not.
- This week, SA scientists will release their in-vitro study on Omicron, and it may prove to be a catalyst for a significant improvement in risk appetite if it builds the argument that the pandemic may be winding down. EM currencies will enjoy improved conditions if that is the case and the ZAR, along with other currencies, hold the potential to stage a recovery. Of some significance this week will be the SARB’s quarterly bulletin and the release of the latest current account data on Thu. Prior to that, it will be the more usual economic data releases.