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Local Market Commentary
- The marked rally in Zambian hard currency sovereign bonds, triggered by the landslide victory of Hakainde Hichilema, has come to a halt this month. In fact, Zambian Eurobonds have come under renewed selling pressure in recent sessions as a wave of domestic and interna-tional headwinds remerged. Domestically, a Johns Hopkins’ China Africa Research Initiative report found that Zambia may owe Chinese creditors almost double the amount the government has previously disclosed.
- This has put a knife in the side of debt restructuring hopes. The Johns Hopkins report published on Tuesday estimates that Zambia’s total debt owed to Chinese lenders sits at $6.6bn and is spread across at least 18 creditors. According to the report, this does not necessarily mean that Zambia’s total external public and publicly guaranteed debt is bigger than the $14.3bn reported at the end of last year. That said, it does show that the previous administration was not transparent about its debt position. It is widely expected that the lack of transparency and a large proportion of debt owed to Chinese lenders could complicate restructuring talks, including Eurobond holders. The Johns Hopkins report said, given the complicated situation with at least 18 Chinese lenders having provided external loan funding to the Zambian government and its state-owned firms, reaching consensus on burden-sharing is likely to prove exceptionally difficult.
- On balance, while the newly elected Hichilema administration has vowed to sort out Zambia’s precarious fiscal situation, given all the question marks about the actual level of indebtedness, the task ahead for the government is more complicated than some may have ini-tially thought. Until there is clarity on the true extent of Zambia’s debts, prospects for a debt restructuring and a financial program with the International Monetary Fund are dampened.
- As such, we expect the inversion in Zambia’s Eurobond curve to worsen as near-term fiscal risks intensify. Recall that Zambia was the first African nation to default on its debt in the COVID-19 era. Unlike most emerging markets, Zambia’s shorter-dated 2022 Eurobond yield is trading at a premium to the longer-dated 2027 Eurobond. This is a function of heightened near-term fiscal risks and persistently high infla-tion. The inversion in the Eurobond curve underscores just how significant Zambia’s fiscal and macroeconomic challenges are.
- A copper industry veteran, Diego Hernandez, head of Chilean mining society Sonami remains bullish on the prospects for the red metal despite all the headline driven volatility seen of late. Bloomberg reported Hernandez, who’s a former chief executive of Codelco and An-tofagasta Plc as saying – The supply-demand equation for copper is “very tight,” even amid market-wide uncertainties fuelled by Chinese property turmoil and a global energy crunch.
- The price of the red metal has dipped this morning in the Asian session with investors preferring a cautious stance with uncertainty caused by the Chinese power producer cuts and a major Chinese Holiday which starts on Oct 1 and lasts for a week.
- The 3m LME benchmark is currently marginally lower at $9247/tonne as we enter the start of the EU session.
- Moving over to the US, Senate Republicans have stalled the Democrats’ efforts to raise or suspend the debt ceiling for a second day run-ning. Given the 60 votes needed, the normal procedure of passing the bill will not work given the Republicans’ reluctance to legitimise more deficit spending, which will only ramp up under the Democrats. The Democrats counter that by arguing that the debt ceiling was reached so quickly due to the Trump tax cuts that reduced tax revenues. Both have their points of view and are hardening. The Republi-cans have informed the Democrats that they should use a special mechanism to pass the bill with a simple majority. Doing so could, how-ever, have implications for their larger spending programme. Given this standoff, there is a growing probability that the U.S. will face an-other shutdown that might further detract from the business cycle and raise risk perceptions.
- Meanwhile, Fed Chairman Powell faced a grilling yesterday at a congressional hearing on a range of topics, from ethics and diversity to in-flation and regulation. He came in for some heavy criticism, but at the end of the day, very little was said that could change market expec-tations on the timing of a taper or the normalisation of monetary policy.
- In the FX markets, the Kwacha closed marginally weaker yesterday, extending Monday’s modest losses. Meanwhile, the USD for now remains on the front foot, but the modest overnight retreat in the U.S. 10yr has taken some of the momentum out of the market. How-ever, the gains on the USD are reflective of a rise in risk aversion and in Asia, this morning, stock markets are trading lower. Risk appetite is waning, and the USD will therefore enjoy some support. Expectations of the taper, the Evergrande saga, rising UST yields and retreating stocks should see the USD end the week on a firmer footing, especially if the data towards the end of the week meets or beats expecta-tions.
Rand and International FX Commentary
- Major and emerging market currencies remained under pressure yesterday as the US dollar continued to surge ahead, buoyed by surging US Treasury yields as investors price in a potential November start to Fed asset purchase tapering and potentially stickier inflation than originally expected. Furthermore, increased levels of risk aversion have accompanied data showing slowing growth in China amid current power shortages. Overall, this led the USD to secure a third consecutive trade-weighted daily advance yesterday. The DXY, which measures the greenback against a basket of major currencies, rose to its highest since November 2020.
- The ZAR, which often moves in lockstep with the USD and would be subject to risks from deteriorating growth in China, resumed its de-cline yesterday and led EM currencies weaker with a 1.30% daily loss. Domestically, sentiment was subdued as quarterly employment da-ta from Stats SA showed formal sector employment, excluding agriculture, took a hit in Q2. Specifically, non-farm payrolls declined 0.9% q/q, while the civil unrest seen in July and persistent lockdown restrictions suggests the labour market will have remained under pres-sure.
- As such, this may have dented most positivity stemming from the SARB’s quarterly bulletin released yesterday, which showed SA record-ed its first quarterly primary budget surplus since 2018 in the second quarter of the year. However, recall that tax revenue received a boost thanks to higher commodity prices and a windfall in mining profits, which would have undoubtedly supported the surplus. Never-theless, it does suggest that National Treasury is making progress in consolidating expenditure, while the primary surplus will also help SA service its high debt costs.
- As for risks going forward, S&P Global Ratings weighed in yesterday in an emerging market economic outlook, noting higher borrowing costs once global DM monetary policy tightening begins poses significant risks to SA’s economic outlook, in addition to potential spillover effects from the Chinese property sector which could weigh on demand for metals. The ZAR, which has maintained a level of resilience due to buoyant commodity prices despite repeated lockdowns and a damaging bout of civil unrest, faces notable risks in this regard. S&P also noted the pace of economic recovery might begin to slow in the coming quarters, with the export boost fading away, while high un-employment and slow vaccination progress will hold back consumer and business confidence.
- In the spot markets, the ZAR has recovered slightly from overnight lows of 15.17000/$ and is currently trading marginally firmer than yes-terday’s close of 15.1300/$. Despite this, EM currency sentiment has remained mixed in early morning trade, with few signs of risk aver-sion settling. Asian equity benchmarks are a sea of red this morning, while the USD is holding firm near recent highs, suggesting riskier currencies will have a hard time securing gains in current trading conditions.