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- Ratings agency Moody’s yesterday announced that it had completed a periodic review of a group of issuers that included Zambia. The re-view did not involve a rating committee and does not indicate whether or not a credit rating action is likely in the near-term. According to Moody, the credit profile of Zambia (issuer rating Ca) is constrained by the country’s “b2” economic strength, reflecting its small size, low per capita income, and persistent economic challenges. The “caa3” “institutions and governance strength takes into account a weak gov-ernance profile, very low fiscal policy credibility and effectiveness, as well as a track record of arrears and the recent default. Meanwhile, the “ca” fiscal strength reflects unsustainable debt dynamics that have increased the likelihood of a sovereign debt restructuring resulting in large losses to private-sector creditors, as well as weak debt affordability metrics due to increased cost of debt and reliance on com-mercial debt. Finally, its “ca” susceptibility to event risk is driven by acute liquidity and external pressures, limiting its capacity to service debt and leading to the default on its Eurobond.
- Meanwhile, the Zambian government is planning to facilitate a debt restructuring programme that will enable state-owned power utility Zesco to resolve its financial obligations to Maamba Collieries Ltd. Last week Energy Minister Peter Kapala said that Zesco currently owed the coal-mining company more than $400mn. Kapala added that the utility has continued to accrue the debt because it is currently only paying about 40% of the amount it owes and that Maamba is looking for a guarantee that Zesco will settle the debt once the latter com-pany has raised enough money. The government’s move is a welcome development for Zesco, given its rising debts to suppliers such as Maamba and independent power producers (IPPs) such as Ndola Energy and Itezhi tezhi Power. Kapala recently said that Zesco’s total debts had risen to about $3.5bn as of September 2021, and the debt was largely the consequence of supply problems. The utility is de-pendent on costly emergency power imports and electricity generated by IPPs, which carries a higher tariff.
- All eyes remained focused on the copper markets yesterday following a cash squeeze which resulted in the premium demanded for spot delivery rising by over $1100/tonne by the close of Monday’s trading as a result of historical low inventories.
- The LME stepped in yesterday to quell the disorder by amending the rules for low stock copper trading with immediate effect. Reuters reported – The exchange said members and their clients were prohibited from placing orders in tom-next contracts for copper on any LME Execution Venue at a price in excess of 0.5% of the previous day’s cash price. Additionally, members holding short positions in copper unable to fulfil their delivery obligations or to borrow metal at a backwardation of no more than 0.5% of the previous day’s cash price, may have their delivery deferred by the Exchange, aided by LME instructions. “Those with long positions for prompt on those days who are subject to deferred delivery will need to book a tom-next carry against the respective shorts selected by the Exchange at a price of 0.5% of the previous day’s cash price.”
- Moving over to the US, alongside the Fed’s Beige Book, a host of Fed speakers will take to the podium today and offer further guidance on the outlook for Fed policy. A poll conducted by Reuters shows that the Fed may well prove more sensitive to the growth environment than first thought and only embark on lifting rates in 2023. In between now and then, the taper will take place, but at a gradual pace. In-vestors are hoping that today’s Fed speakers will offer some clarity, although it is unclear whether there is anything new to discuss and whether it will change market expectations to any significant degree. Hard data is likely to be more impactful in driving equity markets and the USD in the coming days.
- The Biden administration will seek to push forward their efforts to pass their enormous spending plan on the political front. However, to secure the level of support needed, some compromise was necessary. The final size of the spending package is likely to shrink towards the $2.0trln mark to win over the more moderate Democrats. Republicans will still rally hard against the bill and the associated tax increas-es that will follow. Biden would like to widen the U.S. safety net and re-invigorate infrastructural spending that has been neglected in re-cent years.
- As more companies and states mandate vaccinations to return to work, a string of legal challenges and protests could follow. It could also impact the labour market stats depending on how strongly people feel about not being vaccinated. Countries worldwide will watch how this all unfolds to see on which side the argument will eventually settle. The high court now dismissed a legal challenge in Maine where healthcare workers objected to the vaccinations on religious grounds, setting the stage for more such challenges and establishing prece-dent.
- In the FX markets, the Zambia Kwacha came under slight pressure yesterday, closing the session on the back foot. Meanwhile, alongside stock markets that have rallied on expectations the Fed may turn more sensitive to growth, the USD has come under pressure. Risk appe-tite has improved, and risk assets have responded to the firmer USD by rallying themselves. Bitcoin is trading just below record levels while emerging market currencies are capitalising on the trend too. Nothing in the way of data today will see the focus turn to the Fed speakers that are scheduled to offer further perspective on their expectations and the context against which they will make their deci-sions. Given how much information already exists in the market, it is unlikely that they will offer investors anything new.
Rand and International FX Commentary
- The ZAR swung into positive territory for the week so far yesterday, gaining 1.15% to close at 14.5150 to the USD which remained bur-dened by evidence of an uneven recovery amid supply constraints. While the ZAR’s sensitivity to external market sentiment saw the unit amongst the leaders of the EM currency sample yesterday, this was shared amongst most emerging market and major currencies. The USD’s drop from recent one-year highs has coincided with more hawkish communication involving inflationary concerns from other major central banks. With the next Fed meeting at the start of November, the market may be positioning itself for the potential that the Fed announces a slower than expected tapering process, resulting in other DMs reducing monetary stimulus at a faster pace.
- With these concerns at the fore of the market psyche at present, today’s inflation releases out of the UK and Eurozone area will be of great importance. UK inflation is expected to remain elevated at 3.2% y/y, while the final September reading for EZ inflation is expected to rise to 3.4% y/y from a flash print of 3%. With growing concerns that a spike in inflation will prove to be less transitory than initially ex-pected, higher inflation prints could bolster bets that other major central banks would need to fast track policy tightening, which could further weigh on the trade-weighted USD given how much relative Fed tapering has been priced in.
- Domestically, Stats SA also releases September’s CPI figures. On an annual basis, CPI is expected to rise 5%, up from 4.9% y/y in August, which would be the fifth month SA consumer price inflation has remained buoyed above the midpoint of the SARB’s target 3-6% range. Persistent supply-side constraints alongside rising logistics, energy and global commodities prices all tilt the risk to the inflation outlook to the upside, suggesting that inflation will remain above this mid-point level in the months ahead.
- Alongside some ZAR strength since the start of the month, the SARB may have been bought some time should the Fed ultimately play ac-cording to cooling expectations of policy tightening. However, the SARB, in its latest monetary policy review, expressed concerns about these elevated inflation pressures and are worried about destabilising CPI expectations if they do not hike rates soon. On the other hand, the weak demand environment and low credit growth, evident from the recently released retail sales data, raise some question marks over the SARB’s ability to tighten monetary policy.
- Overall, this implies the local currency may have a more volatile end to the year and should remain highly sensitive to changes in the out-look for global monetary policy tightening, which is already evident. Over to the spot markets and the ZAR has managed to hold onto yes-terday’s gains, while the USD has remained under pressure after failing to sustain moves higher overnight. Asian stocks are off to a buoy-ant start this morning, following gains on Wall Street, with US stocks receiving a boost from earnings results. In addition to today’s infla-tion prints, markets will turn to a host of Fed speakers later in the day, where hawkish comments could provide the USD with some sup-port.