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Local Market Commentary
- There are significant reforms on the cards for Zambia as part of the IMF deal which as always includes the removal of subsidies and programmes which are fiscally unsustainable. To this end, the finance minister Situmbeko Musokotwane has urged Zambians not to fear the tough reforms that are part of the preliminary bail out deal he has secured with the IMF, but to see it more as part of a process to create a more sustainable fiscal environment. Fuel and electricity subsidies will certainly be cut even with inflation running close to 20%, and other non-essential expenses will come into the firing line in due course. Bloomberg reported the following – “Cool down, don’t be scared,” Musokotwane said at a news briefing Monday in Lusaka, the capital. “You’ll be happy in the next two, three years. You’ll come pat us on our backs and say ‘Oh, we were just scared for nothing’.”
- What is important to note is that Musokotwane is a seasoned veteran at dealing with the IMF. He was responsible for the implementation of the last IMF economic programme more than a decade ago during his previous stint as finance minister. During that time the Zambian economy grew swiftly with 2010 recording a GDP reading of 10.3% helped by his guidance and soaring copper prices.
- Speaking of copper, The benchmark 3m LME copper finished just short of 1% higher yesterday closing at $9505/tonne. The red metal initially dipped during the first half of the Asian trading session but we have the contract trading flat into the EU open. Fears surrounding Omicron and its effect on the global economy are fading while supply concerns remain in place given the developments in Peru.
- In other news supporting base metals in general, China has cut the amount of cash banks need to hold in reserves releasing CNY1.2trn in long term liquidity which is aimed at propping up the stalling economy.
- Internationally, U.S. officials have confirmed that they will boycott the Beijing Olympics over human rights atrocities. This is unlikely to endear the U.S. government to the Chinese, given the talks that occurred just a few weeks ago were labelled conciliatory. China’s embassy has already labelled the boycott as “political manipulation” as so far, no invitations had yet been extended to any U.S. diplomats. “In fact, no one would care about whether these people come or not, and it has no impact whatsoever on the Beijing 2022 Winter Olympics to be successfully held,” according to embassy spokesperson Liu Pengyu. Relations are clearly far from genial.
- Moving over to the FX markets, investors are starting to question the sustainability of the current strength in the USD. It has appreciated considerably in a fairly short space of time but has recently shown reluctance to rally much further. The weekly chart shows the USD to be overbought, and fundamentally, there are good reasons to argue for a USD correction. One of the main reasons will be the studies conducted on the Omicron variant that might very well prove far less virulent than previous variants and require minimal hospitalisation. Such news would help bolster risk appetite and assist risk markets in staging a material recovery in the final weeks of the year. A bout of profit-taking on the USD is long overdue given how much has been priced in.
- The narrative of an overbought dollar and substantial progress being made with the IMF deal will support the ZMW as we head further into the December month, we do however expect liquidity and price action to decline from next week as many companies and investors head out for the annual December holidays
Rand and International FX Commentary
- Yesterday was a rangebound day, with the USD-ZAR offering very little in the way of directional bias. As SA still waits for scientists to confirm whether Omicron is something restricting the economy, investors are not yet trading fully on the anecdotal evidence suggesting that although highly transmissible, Omicron is a milder form of Covid. If the scientists concur, this will be something to cheer and, on aggregate, would build the case for travel bans to be lifted against SA and remove any reason to disrupt holiday tourism.
- Globally, it might also hold implications for safe-haven destinations that may no longer attract portfolio flows in the way they have recently. The USD could come in for a healthy correction and allow the ZAR to recover from the current oversold positions. A weaker USD would also boost commodity prices, which have supported the ZAR and the SA economy so well through the past year.
- On the topic of the economy, today will see the latest GDP stats for Q3 released. The data will likely show that the economy expanded by between 3.5-4.0% y/y. This is a poor performance, negatively affected by the riots mid-year, the resumption of load shedding, high oil prices and ongoing restrictions due to the pandemic. In q/q terms, the economy likely contracted by roughly 1.2% to offer context as to the persistent rise in the unemployment rate.
- Although the data is unlikely to boost sentiment towards SA much, investors are reminded of two things. Firstly, the data is very historical. SA is mid-way through the final month of Q4, so the data is well and truly dealt with. Secondly, that weakness in GDP tends to support rather than detract from the ZAR’s performance. A weak economy tends to be associated with lower levels of consumption and investment. Both detract from the strength of the imported component of the trade balance, which again offers insight into why SA’s trade and current accounts have remained in such strong surplus positions through Q3 and into Q4.
- The USD-ZAR is due a correction lower, and the combination of the Omicron variant potentially signalling the beginning of the end of the pandemic and soft GDP growth driven by weak consumption and investment offers the ZAR the reasons needed to stage a recovery, as counterintuitive as the latter may sound