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Zambia Market Watch –  Moody’s paints a sombre outlook for the Sub-Saharan Africa region

November 18, 2021by Nicholas Kabaso
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Local Market Commentary

  • To position the country as a preferred investment destination to the business community, Zambia is seeking to introduce a one business li-cense policy. Minister of Commerce, Trade, and Industry Chipoka Mulenga yesterday said that the ministry is considering reducing the number of licences required to set up a business in Zambia. The minister added that the current approach and legislation in the trade and investment sectors were not giving the government desired results and that the one-license policy will make investments favourable to the business community. The minister also indicated that the government was engaging businesses and leading financial institutions to ensure that share-holding for local businesses was increased in multi-national companies.
  • Moody’s yesterday painted a sombre outlook for the Sub-Saharan Africa region. Specifically, Moody’s said the outlook over the next 12-18 months is negative due to fragile economic recovery, persistent external risks, and limited scope for adjustment. According to the agency, while economic growth for the region will accelerate marginally in 2022, “it will be insufficient to recoup the output and income losses triggered by the pandemic.” Meanwhile, knock-on effects will keep fiscal deficits and borrowing requirements elevated next and the debt burden high. Moody’s added that “in the absence of further international support, debt affordability will likely weaken further, intensifying liquidity pres-sures and external vulnerability risks, particularly given the limited capacity of domestic banking systems to provide finance as Eurobonds ma-ture over the next few years.”
  • The price of copper has been plagued by a stronger dollar of late. Yesterday the red metal shed 1.63% to close at $9406.50/tonne. This morning the trend has continued with copper trading 0.35% lower at $9374.00/tonne into the start of the EU session. Technically a close below the 200D moving average at $9408.00/tonne would be bearish and may well entice shorts to take the metal lower, however the move will likely be short lived as the broader macro narrative of electrification and decarbonisation keeps bids primed.
  • This view was supported by comments made by a BHP Group executive yesterday. “Some of the modelling that we have done showed that in, let’s say a decarbonised world … the world will need almost double the copper in the next 30 years than in the past 30,” said Vandita Pant, BHP’s Chief Commercial Officer, at the FT Commodities Asia Summit. “And for a commodity like nickel, that quadruples. So four times nickel needed for the next 30 years than the past 30 years and all to be done as sustainably as possible,” Pant added.
  • This follows comments earlier in the week by the global trading giant Trafigura that there are significant risks surrounding deficits for cobalt, nickel and copper as global demand rises for electric vehicle batteries and renewable energy. CEO Jeremy Weir was quoted as saying the fol-lowing – “Some of these metals are just not going to be available due to the increase in demand,” he said. “We’ve already seen a significant in-crease in demand not just from China but also from the U.S. and from Europe and we expect to see significant deficits in some commodities.”
  • In the U.S.,  an update to the labour market through the latest weekly jobless claims will attract some attention today, given the market re-sponse to stronger than anticipated data. Most data collectively point to an unfolding economic recovery that can gain momentum once the dust settles on supply-side and logistical constraints. One would expect to see initial claims remain relatively subdued and for wage inflation to gradually improve. Such a combination would match expectations and confirm that the labour market continues to tighten and will contribute to an end of year consumptive flourish for the U.S. economy.
  • In the FX markets, the Zambian Kwacha remains on the backfoot as demand for hard currency continues to surpass supply. Meanwhile, the USD has retreated off its recent highs as it takes a breather. It has responded constructively to a shift in monetary policy expectations, while recently strong data has only served to exacerbate the USD’s move. However, one should not make the mistake of believing that this trend will remain intact indefinitely. There is a lot of hawkishness priced into the USD, and it is far from clear that the USD has much further to go once the narrative for other central banks starts to turn equally hawkish. On the contrary, there is asymmetrical risk building that the USD will not sustain current levels indefinitely.

Rand and International FX Commentary

  • Ahead of the SARB’s MPC decision and statement this afternoon, the ZAR has trodden water. It will be a close call, and the guidance offered will shape what investors price into the market for months to come. The degree to which the market is convinced of rate hikes could play a material role in how the ZAR performs. A hawkish statement could assist the ZAR to regain some composure at the margin. The opposite also holds true.
  • But the MPC has a lot to weigh up. On the one hand, SA’s economy is sputtering and misfiring, plagued by a host of structural issues that will ensure that demand-side pressures remain subdued. On the other, the global economy is experiencing an inflation episode which has prompted many central banks to respond by hiking. Deciding not to hike has a limited lifespan, especially if all other central banks are raising rates. Leaving SA rates unchanged only serves to heighten ZAR vulnerability and susceptibility to any shock or rise in risk aversion.
  • If price stability remains a clear mandate, the SARB will not want to fall behind the curve. It will know that hiking gradually and incrementally is a lot easier to adjust to than a series of much bolder hikes because they waited too long and have to play catch up. In a nutshell, the risk to the ZAR today is that the MPC decides to hold off for a little longer. Hiking rates, even by a relatively small amount of just 25bp will do little to detract from economic growth but would send a message to the market that the cycle has turned and that the SARB remains conservative.
  • In the first scenario, the ZAR might lose some ground into the weekend. In the latter scenario, the ZAR will likely recover. However, there is also a third scenario, which is a blend of the two. The SARB could choose to hold off but indicate that it will be hiking as early as the next meeting and that the cycle has turned. Not raising rates but sending a clear message that the tide has turned is an option that might generate a mixed response from the ZAR. In summary, this MPC will be a close call, and the outcome will likely shade ZAR performance in one direction or another. More consolidation is anticipated in the run-up to the decision, with some more definitive direction likely after that.

Nicholas Kabaso

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