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Zambia Market Watch -Zambia begins talks with the IMF

November 5, 2021by Nicholas Kabaso
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Local Market Commentary

  • A spokesperson for the International Monetary Fund, Gerry Rice, yesterday said that the IMF had launched talks with Zambia over a new aid programme, but the timetable for reaching a deal for the debt-laden country is unclear. Note, the Zambian government has stressed the importance of securing a deal with the IMF to help it deal with its crippling debt, which swelled to $14.7bn and caused the country to default last year. Rice called Zambia’s debt “unsustainable” and said that “the IMF would need sufficient financing  assurances from credi-tors before a staff-level agreement on an  extended credit facility could move forward.” While the timeline for reaching an agreement is unclear, it is worth noting that IMF Head Kristalina Georgieva earlier this week said she was “optimistic” that a deal will be made with Zambia.
  • Moving over to news on the continent, speaking at a briefing yesterday, Director of the Africa Centres for Disease Control (CDC) John Nkengasong said that African countries need to start widely using rapid antigen tests to take advantage of lulls in the pandemic and quick-ly react to any small, local coronavirus outbreaks. According to Nkengasong, “we are at a trough in the number of infections, so I am ap-pealing for the continent to scale up testing and to scale up vaccination. If we vaccinate now intensely, we can blunt the next wave and if we test now, we can find hotspots before it flares back up.” Nkengasong further called on African countries to gather information that will help them make informed decisions early on, before a need for further harsh lockdowns. Note vaccine hesitancy and a slow rollout in many countries on the continent threaten to derail economic growth recovery prospects.
  • Meanwhile, the UN earlier this week launched a new short-term lending market for African bonds in a move that it says could trim billions of dollars from government borrowing costs across the continent. According to the UN, the liquidity and sustainability facility (LSF) will al-low investors to use African debt issued in foreign currencies such as dollars and euros in repo transactions. An initial $200mn is planned for early next year, with funding expected to be provided by Africa Export-Import Bank and other investors. Backers of the project are seeking additional sources of funding to scale up the facility. According to the UN, the funding is expected to include a portion of the $650 special drawing rights created by the IMD, and the size of the facility could reach $30bn. The facility will focus on countries that the IMF does not judge to be at high risk of fiscal distress.
  • In the base metals complex, copper prices are flat this morning, not much to report back on. The red metal is currently marking time around $9455.00/tonne as we head into the EU open.
  • In the US, capturing the headlines yesterday was President Biden’s announcement on Covid vaccine rules for businesses. The Biden ad-ministration has mandated that workers at U.S. companies with at least 100 employees be vaccinated against Covid-19 or be tested week-ly from 4th January onwards. This decision will undoubtedly be challenged in the courts, while the Republicans have responded quickly with a backlash, vowing to do everything possible to protect individual freedoms of choice. Biden has adopted this stance to drive up the number of vaccinated people to overcome the pandemic.
  • Today will see the House of Representatives vote on the social and climate change bill and the bipartisan infrastructure bill. The Demo-crats feel they have the internal support needed to get these bills passed and seek to do it before the weekend. Biden’s popularity and that of the Democrats has been waning recently, and a political win of this nature will help them generate some positive press. Treasury Secretary Yellen chimed in, that the legislation would raise $2.0trln to pay for the bill and still allow for some deficit reduction. Critics have said that such views assume a lot and will require very efficient implementation by the government.
  • Much of the market’s recent positioning for Fed rate hikes as soon as next year is built on the assumption that the U.S. economy and the labour market will continue to recover strongly in the months ahead. Therefore, in the unlikely event that the expected improvement in economic and labour market conditions does not materialise, the market may need to reassess its recent positioning. Against this back-drop, the market will digest the upcoming October employment report, which will help investors position more accurately for prospective monetary tightening.
  • The USD is ending the week on a firmer footing, boosted by the combination of some strong labour market data earlier in the week. The data has given rise to expectations that the payrolls figures scheduled for today will beat expectations to the topside. Also, supporting the USD has been the weakness of the GBP after the BoE failed to lift rates yesterday. Furthermore, the possibility of some risk aversion ex-ists on account of more difficulties in the Chinese property sector that will raise concerns about China’s economic prospects in the coming quarters. Barring any nasty surprise in the payrolls data, the USD should end the week on a slightly firmer footing, although it should be added that there is a lot priced into the USD.
  • Locally, the Zambian Kwacha is expected to remain on the defensive next week as demand for hard currency continues to outpace sup-ply.

Rand and International FX Commentary

  • Notwithstanding the surge in the USD, the ZAR was still able to close out yesterday’s trading session a little stronger. Overall levels of risk appetite have improved, the cost of hedging against a collapse in US equity markets has dropped recently, and oil prices have retreated off their recent highs in a boost to SA’s terms of trade. Add to that some local factors such as the conciliatory tone of political parties to work together following the elections, and there is some justification for the retreat in the USD-ZAR from recent highs.
  • However, the ZAR is not out of the woods just yet. Wall St futures are trading flat to slightly lower this morning, and focus has turned back to China after another property developer appears to be in financial trouble. Kaisa Group Holdings and three of its subsidiaries halted trading in their shares just before the market opened in Hong Kong after its finance company missed a payment to a wealth management product. This is significant so soon after the revelations on Evergrande because it is the second-largest issuer of dollar-denominated off-shore bonds behind Evergrande. It speaks to a far greater debt problem in China than was first understood.
  • For SA this is all particularly relevant in that China is SA’s single biggest trading partner. As it is, the Chinese economy has entered a soft patch. Add to that some headwinds concerning the property market’s indebtedness and weaker demand for SA exports may start to weigh. Therefore, while there is a lot priced into the USD-ZAR and some retreat into the weekend may look warranted, it is unclear whether it will be sustained.
  • Finally, it is worth noting that US non-farm payrolls data will be released today. Although the data has lost some significance on account of the Fed’s policy decision and statement on Wed, it will still hold some market-moving potential. It may still hold enough significance to keep investors a little cautious ahead of the weekend. Furthermore, SA still has the upcoming MTBPS to contend with in a week’s time. Although it will deliver a more upbeat assessment of the government’s fiscal position, it will still reflect how much work SA needs to do to stabilise its finances. Expect some cautious trading ahead of the weekend.

Nicholas Kabaso

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