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Local Market Commentary
- Yesterday, the Zambia Finance Ministry indicated that the International Monetary Fund’s resident representative for Zambia, Preya Sharma, met with new finance minister Situmbeko Musokotwane. According to the ministry, “the meeting discussed various aspects of strengthening the partnership between Zambia and the Fund.” Note, minister Musokotwane has pledged to conclude talks with the IMF on a lending program by October. Note, there is growing optimism that the Hichilema administration will be able to put the country back on a sustainable debt trajectory.
- In another move that will bring comfort to the ears of investors, newly elected President Hakainde Hichilema vowed on Tuesday to un-cover Zambia’s true debt burden. President Hichilema said that Zambia’s public debt exceeds what the official figures from the previous government show. According to official figures, Zambia’s external debt pile sits at $12.7bn following years of government budget blow-outs fueled by over-borrowing and the mismanagement of state funds.
- President Hichilema said in an interview on Tuesday that “we had known for a long time that there was non-full disclosure.” The President added, “so now that we’re in, we are beginning to see that the debt numbers that were being talked about officially are not really the comprehensive numbers.” The disclosure of Zambia’s real debt figures may help remove a significant hurdle for talks with bondholders. Moreover, it may improve chances of a deal with the International Monetary Fund, a prerequisite for any debt restructuring.
- President Hichilema said, “you have deals that were structured outside the normal channels, we’re talking about debt that was accrued, acquired without parliament approval.” President Hichilema closed off by saying, “one of our jobs right now is to dig into, trying to zero in on what the true debt is: both foreign and domestic debt. We are working through it, and we’ll get to the bottom of it soon.”
- This is the latest sign that the Hichilema government is committed to reforming the country and is serious about reigning in Zambia’s bal-looning debt pile. The President’s commitment to fiscal reform suggests that bullish bias in domestic assets is likely to persist. That said, investors will want to see President Hichilema “walk the talk” and not just “talk the talk.” Therefore, the performance of domestic assets over the medium to longer-term will depend on whether the newly elected government shows concrete evidence that it is reforming the nation.
- The Bank of Zambia is set to deliver its latest verdict on the policy rate today. Expectations are that policymakers will leave the policy rate unchanged, with inflation slowing as the Kwacha’s world-beating steak has helped rein in imports. This will provide some room for the BoZ to continue supporting the domestic economic recovery.
- The news of the base metal sales and a slowing of Chinese factory activity with the Caixin/Markit Purchasing Managers Index slipping into contraction for the first time since April 2020 have provided the shorts with ammunition this morning to take copper lower. The PMI read-ing slipped to 49.2 from 50.3 in July, COVID-19 containment measures, weather conditions and supply bottlenecks all having an impact. The benchmark 3m LME copper contract was trading some 0.7% lower at $9448/tonne at the time of writing.
- Stateside, the withdrawal from Afghanistan is now complete with President Biden adding that it would bring an end to the U.S’s attempts at nation-building. In the face of massive criticism, Biden has labelled the withdrawal a success and tout’s himself as the president brave enough to take a decision many didn’t want to. However, the criticism of the handling of the exit is warranted and the chaotic exit will count against the Democrats at the polls in the next election. Geopolitically, there are also many unknowns that could come back to haunt Biden and the Democrats in the years ahead if the region becomes a breeding ground for extremists.
- Today some important data is released starting with the first of three labour market reports in the ADP data. With the timing and convic-tion of the Fed’s taper in the months ahead dependent on the recovery of the US labour market, investors will keep a close eye on up-coming ADP employment change data. Consensus expectations for the August print point to a strong increase in the number of jobs add-ed in the US economy, as the reopening continued despite concerns over the resurgence of COVID-19. This holds the potential to drive a rise in consumptive demand and inflationary pressure.
- The USD staged a slight recovery off its lows, but without much conviction as investors positioned themselves cautiously ahead of a string of three important labour market releases starting with today’s ADP data. The ultimate release will be Friday’s payrolls numbers. Investors are looking for any clues that the labour market is strengthening to the point where a taper becomes justified. Any disappointment will see the USD resume its slide and broader levels of risk appetite improve with the knowledge that the Fed will remain accommodative for longer.
Rand and International FX Commentary
- Market sentiment has remained broadly upbeat this week, with higher-beta EM currencies advancing especially well as the US dollar re-mains under pressure following last week’s Jackson Hole speech from Fed Chairman Jerome Powell which indicated the Fed was in no hurry to begin raising interest rates. As for the ZAR, the local unit added another daily gain to its current win streak, taking the total to seven consecutive daily advances. Yesterday saw a notable gain of 0.95% for the ZAR, while settling at the key technical level of 14.5000/$.
- With that, the local currency could close August marginally in the green, surprising since the month saw substantial depreciation pressure. Substantial Fedspeak in recent weeks has raised uncertainty over when tapering of central bank asset purchases could occur, as well as broader monetary policy tightening. This has ultimately pressured the USD and supported EM assets, given the outlook for lower-for-longer US yields while EM debt still offers attractive returns. Thus, the last two weeks of ZAR appreciation, which reversed its August losses, has primarily been linked to external dynamics.
- While the ZAR remains at the mercy of broader sentiment, domestic markets pushed on through the slew of local data releases this week. Yesterday held some insightful data for the broader economy and economic fundamentals, starting with money supply and private sector credit growth, which both accelerated in July. However, this held little influence on markets as the data remains anchored near re-cent lows and continues to suggest monetary dynamics in SA remain very tight, helping to keep inflation contained. This will ultimately feed the view that the SARB will have limited justification on the inflation front to hike rates into the end of the year. While bets on US Fed policy tightening have cooled, a steadier rate hike cycle for SA would still limit the attractiveness of domestic assets, thus minimising support to the ZAR going forward.
- On the other hand, supportive of the local currency, yesterday’s trade data showed SA’s trade surplus remained intact in July. While the surplus dipped from R54.5bn to R37bn, this was likely a one-off given disruptions from riots and protests. Looking ahead, positive trade dynamics are set to remain due to global trade momentum and a comparatively weaker outlook for domestic imports given still de-pressed domestic demand. While positive trade dynamics have offered the ZAR a great deal of resilience this year, it must still be noted that SA’s weak fundamentals will keep the ZAR highly risk-sensitive, with little to support the local unit once sentiment turns in favour of haven currencies.
- As for the day ahead, focus turns to the final readings for August manufacturing PMIs across developed markets. In the spot markets thus far, emerging market currencies have struggled for traction after several Asian manufacturing PMIs showed slowing factory activity in Au-gust. Given implications for global growth, sentiment has kicked off on a sourer note than at the start of the week. Additionally, markets are likely to trade cautiously ahead of US ADP private sector employment data, given it will set the tone for the official US labour market report scheduled for Friday.