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Zambia Market Watch – S&P scheduled to deliver a credit rating status update

August 20, 2021by Nicholas Kabaso0
Please click here to access the full Market WatchLocal Market Commentary

  • Zambia Chamber of Mines has indicated that if the industry can reach an agreement on royalties with President-elect Hakainde Hichilema’s new administration, copper producers are ready to start expansion projects worth $2bn in 2022. According to the Chamber of Mines, companies including First Quantum Minerals Ltd. And EMR Capital are prepared to raise funding for the projects. At the same time, other producers need to spend “hundreds of millions on dollars” on capital that they held back since 2019 because of tax changes that deterred investment.
  • Zambia is scheduled for a credit rating status update by S&P today. Recall the rating agency cut the nation’s sovereign credit rating from “CCC-“ to “SD” in October last year. Underpinning S&P’s rationale was that the agency viewed the non-payment of debt service and the statement that the government will not make debt service payments as a default on its commercial obligations. Note Zambia became the first coronavirus-era debt default on the African continent as it missed a $42.5bn Eurobond payment late in November. Given the new change in leadership in Zambia bringing optimism of a swift resolution to its debt challenges, we expect that S&P may adopt a wait and see approach. Note the agency, in its last update, indicated that Zambia’s rating could be raised from ‘SD’ should a restructuring deal with creditors be agreed on or if the country cleared its arrears on the unpaid obligations and began making debt service payments. Further-more, a reduction in the size of the fiscal deficit and debt burden over the next year is also seen as a factor that could lead to a rating up-grade.
  • The woes for copper continue as further losses are recorded overnight. The benchmark LME 3m copper price fell by 1.66% to close below the $9000.00/tonne mark at $8894.00/tonne. Bargain hunters have emerged this morning taking the metal 1.4% higher in the Asian ses-sion with the 3m contract regaining the $9000.00/tonne mark. Global growth concerns but especially concerns about the trajectory of Chi-nese growth has taken the dynamism out of the copper market which is a traditional bellwether for economic health.
  • In the debate around the timing of the Fed taper, every bit of new information is important. The latest weekly jobless claims data showed that they fell a further 29k to 348k, or a fresh 17m low. Even more impressive was the decline in continuing claims, which decreased a fur-ther 79k to 2.82mn to confirm that rehiring is taking place at pace and that the jobs lost are being reclaimed. At this pace, the labour mar-ket will have recovered sufficiently to warrant the taper, and this accords with the most recent JOLTS data that showed that the number of job openings was near record levels.
  • U.S. leading indicator data released yesterday showed that economic activity rose in July, with the Conference Board confirming that their leading index rose 0.9% to 116.0. The outcome was a little stronger than expected and builds on the narrative that the economy is recov-ering smartly and that the Fed will have a window of opportunity to start normalising monetary policy later this year.
  • On the political front, Deputy President Harris will be visiting Southeast Asia starting on Sunday. Against the backdrop of rising tensions with China, this is perhaps an attempt to bolster relations with other countries in the region. China’s growing influence in the region calls for some action to be taken to help the U.S. keep some legitimacy and enhance its trade ties. Southeast Asia remains an enormous mar-ket for the U.S. to tap into, and agreeing trade deals allows the U.S. to influence these countries.
  • A combination of factors is playing a key role in supporting the USD. The spread of the delta variant and the way it has resulted in lock-downs in some countries, talk of tapering by the Fed and the impact it has had on financial markets, a steady rise in risk aversion and a col-lapse in commodity prices has meant that the USD has found strong support. Technically, it is poised to surge further, and USD bears as reflected in the latest CFTC data, are currently being squeezed. The current move holds the potential to extend further through the next two weeks, and that will have implications, especially for emerging markets.
  • Locally,  the ZMW continues to rally on the back of the August 12 general election results as investors anticipate that Hakainde Hichilema, who will be sworn in on August 24, will be able to secure an IMF economic program and associated $1.3bn loan by April next year. Moreo-ver, investors expect the president-elect to review the economy, which has been wrecked by years of overspending that led to the gov-ernment defaulting on its external debt since November. Note, the Kwacha has appreciated by around 16% on a week-to-date basis to trade south of the 18.000 mark and record the best performance out of more than 140 currencies tracked by Bloomberg globally.

Rand and International FX Commentary

  • This week’s notable drop in risk appetite continued in yesterday’s trade as stateside developments dominated the day. The Fed’s July FOMC meeting minutes released the previous evening kept any improvement in risk appetite in check through the day, while additional concerns of the global economic recovery topping out also weighed on sentiment. On US monetary policy, given the last FOMC meeting was overall more dovish than expected, the tapering prospects suggested by the meeting’s minutes ultimately rebooted expectations that the Fed would taper asset purchases at some point into the end of the year. Furthermore, US initial jobless claims fell to a 17-month low last week, which points to another solid month of jobs market gains, thus bringing forward expectations that satisfactory labour mar-ket conditions for the Fed will be reached later this year.
  • As a result, the US dollar continued to push higher yesterday, surging to a nine-and-a-half-month trade-weighted high against its major peers. As for the ZAR, a quiet domestic data card saw the unit subject to external developments. As a result of risk-off trading conditions, almost the entire sample of EM currencies ended the day in the red. Higher beta currencies, such as the ZAR, were worse off with the lo-cal currency leading declines amongst other EM and major currencies. By the end of London trading hours, the local unit had ultimately depreciated 1.50% from its previous close, ending at a five-month low of 15.1700/$.
  • On the domestic COVID-19 front, it was announced that coronavirus vaccines would be made available to all those aged 18 and over as of today. This was a decision made by cabinet to accelerate its vaccination drive and stave off more potential waves of infections. With the country still in the midst of a third wave of infections, though, cabinet also approved keeping current restrictions in place. Looking ahead, greater vaccination rates will reduce the need for tighter lockdown restrictions and thus create more certainty surrounding the future economic outlook. This will most likely prove crucial to SA’s recovery but arguably should have been done sooner to have avoided the fur-ther tightening of lockdown restrictions. 
  • Now, SA’s future economic performance hinges on the improvement in business confidence. Should the government struggle to main-tain its reform agenda, it is unlikely that business and labour conditions will improve sufficiently to avoid the lacklustre growth that has plagued the economy in recent years. As for the currency, it is likely to take the brunt of market moves in this scenario with further sus-tained depreciation. In the near term, the bias remains to the downside given strong risk-off sentiment keeping the USD buoyed. In the spot markets, the ZAR looks set for more than a 3% drop this week should it hold above yesterday’s close of 15.1700/$, which is likely to be the case as the USD remains poised for further gains into the weekend given the current squeeze on dollar bears.

Nicholas Kabaso

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