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Zambia Market Watch – Zambian bonds and currency outshine peers in 2021

January 3, 2022by Nicholas Kabaso
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Local Market Commentary

  • 2021 turned out to be another wild year for African currencies as the pandemic morphed and the tide of dollar liquidity turned. A major factor for FX traders to contend with last year was the dollar which ebbed and flowed to the developments on the macroeconomic, geopolitical and monetary policy fronts. Over the last two years, the USD has been subject to whippy price dynamics. First, the currency appreciated aggressively in response to global risk-off amid COVID uncertainties and lockdowns, culminating in Eurodollar market liquidity issues in 2020 and then falling back towards fair value as the Fed re-established swap lines and engaged in QE to stabilise bond yields. In 2021, the prospect of Fed policy tightening against the backdrop of still loose policy in Europe and rising geopolitical uncertainties drove traders back into the USD.
  • While the USD regained traction in the latter part of 2021, there were still a number of African currencies that managed to close the year firmly in positive territory. The best performing African currency tracked by ETM last year was the Zambian Kwacha, which strengthened by almost 27% against the USD on the back of a change of governments, the securing of a deal with the IMF and signs that the new government is pushing ahead with much-needed reforms. The other top performing currencies last year were the Angolan Kwanza and the Mozambican Metical, which both appreciated more than 16% against the greenback. Going forward, as was the case in 2021, we expect the top-performing currencies in 2022 to be a function of positive policy moves on the fiscal, monetary or governance fronts.
  • As the new year kicks off, it is worth taking stock of how African bonds performed in 2021 relative to emerging market bonds. As pointed out towards the backend of last year, African bonds performed exceptionally well in 2021 as investors piled in to take advantage of the attractive yields on offer in an environment of low yields in the developed market bond space. 
  • While taper tantrum fears in the second half of the year sent shock waves across the emerging market bond market, African bonds continued to rally in the final months of last year. As such, the Bloomberg AFMI African Bond Index ex. South Africa closed the year 3.2% higher, while the benchmark emerging market bond index lost around 1.5%.
  • One of the best performing bond performances last year was in Zambia. Recall that after blowing off in 2020 after a default on an interest rate payment, Zambian bonds staged a solid rally in 2021 following the election of President Hakainde Hichilema, who has vowed to rein in the country‚Äôs massive debt pile while at the same time implementing a raft of reforms that are set to right the economy that is currently on its knees.
  • Looking at the year ahead, while the Fed tapering will undoubtedly come as a headwind for riskier emerging market and African bonds, we remain bullish on the latter this year, given just how high the yields on offer are. As we start the new year, Africa remains the market with the highest real yields on offer.

Rand and International FX Commentary

  • A warm welcome back to work to all our well-rested readers! Best wishes from the analytics team for the year ahead. We wish all our clients and readers a year filled with health, happiness and prosperity. Although the pandemic persists, there are many reasons to be hopeful that 2022 will be the year it is finally overcome. From updated vaccines to improved stay-at-home treatments to more effective treatment protocols at the hospitals, mortality rates relative to infections are steadily declining. Once the current Omicron wave has passed, the degree of natural immunity will also have risen significantly to render the global community even more resilient.
  • For now, SA seems to be weathering the virus storm better than most. It would appear that the level of natural immunity from previous infections is high, and as a result, the experience has been better than in most European countries. Nonetheless, there is still reason to remain vigilant. Uncertainty about the future dictates that investors proceed with caution and not take too much for granted. The behaviour of the ZAR through December was a case in point.
  • Although the ZAR ended the year roughly where it started, it still experienced a bout of powerful appreciation in the second last week, only to give it all back in the final week of the year. Not too much can be read into this, given the thin trading conditions that will persist this week, but it does highlight just how unpredictable the ZAR is at present.
  • A reminder to readers that this week starts quietly with several countries enjoying a public holiday for New Year’s Day, which fell on the weekend. Beyond just the shortened week, it also means that many markets will only resume full trading next week and that some volatility could still be experienced through the week ahead. It remains difficult to ascertain clear direction; suffice to say that the news flow out of SA turned a little more positive over December. The ZAR is currently undervalued on a real effective purchasing power parity basis. It does not warrant any further significant depreciation to bring it back into balance.

Nicholas Kabaso

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