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Local Market Commentary
- Fiscal dynamics are in focus this morning. This comes after the central bank announced that the size of the monthly bond auction would increase to ZMW 2.6bn from ZMW 1.5bn previously, marking a more than 70% increase in the issuance size. Moreover, the central bank said it would offer ZMW 2bn in fortnightly Treasury bill auctions, compared to ZMW 1.4bn previously, a rise of 43%.
- The decision to increase the debt issuance size comes on the back of improved investor confidence amid signs that the government is on the brink of securing a deal with the International Monetary Fund. The government needs the extra funds to finance part of the 2022 budget and to cover a large amount of debt maturing this year.
- Note that around ZMW 56bn of bonds and T-bills are maturing this year, while ZMW 25bn of local financing is required for the 2022 budget. Commenting on the additional issuance, a spokesperson at the Bank of Zambia Besnat Mwanza said in a statement that “there has also been a downward trend in the yields arising from the high participation in the government paper by both domestic and non-resident investors.” Mwanza added, “this was on the back of improved sentiment on the Zambian economy and the prospects of an IMF program to anchor macroeconomic stability.
- Yields across the debt curve have plunged as political and fiscal uncertainty eased demand. For context, yields on the front end of the curve, such as the 1yr have fallen to as low as 12% at the end of last year from a high of just below 30% in April 2020. The 10yr benchmark bond yield, meanwhile, has plunged to around 24% from a high of 34.5% in March. While investors continue to demand a significant fiscal premium for holding Zambian debt, given the positive developments on the reform front, we could see a further compression in Zambian bond yields in the months ahead even as global monetary policy is tightened.
- On the news front, Bloomberg reported that the Zambian government is seeking consultants to restructure the state-controlled power utility Zesco. Zambia’s Industrial Development Corporation aims to make Zesco a financially viable and investment-grade utility over the medium term. The turnaround strategy will include a thorough review of all income streams, operating costs, expenses and balance sheets. The IDC aims to settle Zesco’s outstanding debt to independent power producers and prevention of subsequent build-up of arrears. The move to restructure the ailing state-controlled power utility will come as a boost to investor sentiment.
- In the commodity space, the big news from yesterday is that OPEC+ agreed to stick to its initial plans and increase oil output by a further 400k barrels per day in February. This announcement was largely expected and thus didn’t move the market, with the Brent front-month contract still trading just below $80 per barrel. Not only was the announcement expected, but the market has questioned whether or not the actual increases will reach that figure, given constraints in many members operations as well as the likes of Russia nearing full capacity already. This prevented any losses for oil prices on the day as the still positive demand outlook means that the market could, in fact, tighten over the coming months.
Rand and International FX Commentary
- USD strength eventually weighed on the ZAR, which came under pressure yesterday to trade above the 16.0000 handle. However, it remains difficult to trust in this move given the thin liquidity conditions and the possibility that the trading conditions have exaggerated the magnitude of the moves. There was nothing significant fundamentally which the ZAR traded on. If anything, the release of the first batch of Zondo commission findings and recommendations are a net positive and supportive of the ZAR.
- Recommendations include the setting up of an independent anti-corruption watchdog where government has no influence. Although one could argue that this already exists through the NPA and the Hawks, it is clear that this has not worked well and was too open to political manipulation. The commission also recommended charging Dudu Myeni for fraud and corruption.
- Some of the findings included that former President Zuma and SARS Commissioner Moyane were instrumental in the dismantling of SARS, and that government cannot be trusted with the “ultimate responsibility” to fight against corruption. These are dramatic times and President Ramaphosa now has to follow through and ensure that the findings generate accountability that would justify the enormous expense of the exercise. Ramaphosa’s difficulty is doing so without splintering his party and so he will proceed carefully and perhaps with greater sensitivity than many would like.
- The USD remains contained in a well-worn range in the trading session ahead. It is unlikely to develop significant directional momentum ahead of some key US data releases that include the private sector ADP data today, the weekly jobless claims tomorrow and the non-farm payrolls numbers on Friday. The combination will be market-moving for the USD-ZAR and will keep some investors cautious.
- One also needs to keep an eye on the Omicron Covid-19 variant developments. A WHO official yesterday confirmed SA’s findings that the Omicron variant affects the upper respiratory tract more than it does the lungs and that the symptoms are far milder, hospitalisation far lower as is the mortality rate. Indeed, it is great news, and more such findings will be released in the coming weeks. As Covid becomes endemic and the current wave of infections passes, so the resultant immunity will likely mean that the pandemic could be declared a thing of the past later this year. Great news all around and reduces overall levels of risk aversion, which would help support some EM currencies, including the ZAR.