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Zambian Kwacha comes under modest selling pressure

January 4, 2022by Nicholas Kabaso
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Local Market Commentary

  • While the Zambian Kwacha has maintained the title of Africa’s best-performing currency in recent months, it is worth noting that a modest bearish bias has unfolded in recent sessions. After hitting a multi-month low of 16.025, according to Bloomberg data, on December 9, the USD-ZMW has edged higher and closed the first session of the new year at 16.700, according to Bloomberg data. While the Zambian Kwacha has lost more than 4% since December 9, the currency has strengthened by a staggering 21.31% against the USD since this time last year, making it by a long shot Africa’s best-performing currency.
  • As mentioned in yesterday’s note, much of the advance in the Kwacha can be attributed to optimism over the election victory of Hakainde Hichilema in August last year. Recall that the Hichilema administration has pledged to rein the country’s ballooning debt pile and is trying to rework as much as $17bn in external debt. The government has made some significant inroads in securing a deal with the IMF, which will help in advancing talks with creditors, including Eurobond holders and debts owed to China. Recall that Zambia became the first African country to default on its debt in the Covid era.
  • Another factor providing support to the Kwacha has been elevated copper prices. Zambia is Africa’s second-largest copper producer. Moreover, it must be noted that copper makes up around 70% of the country’s export revenue. As such, the buoyant copper prices has resulted in a marked improvement in Zambia’s terms of trade, with the country recording a trade surplus of ZMW 73.4bn through November, compared with ZMW 41.8bn in the same period a year earlier. As long as international copper prices remain elevated, Zambia’s terms of trade are expected to remain positive, which will in turn support the ZMW.
  • On the news front, against the backdrop of a surge in Covid-19 cases, the Education Ministry announced on Monday that it had rescheduled the reopening of schools. Schools were originally set to reopen on January 10 but this has now been moved to January 24. Minister of Education Douglas Syakalima said, “the reason is that although we’re prepared as a Ministry for the reopening of schools, the upswing is a danger.” Minister Syakalima said that the Ministry would use the period to assess the situation and put in place measures such as fumigation of schools before reopening. Zambia is currently facing its fourth wave of the pandemic, with the majority of cases being the recently discovered Omicron variant.
  • As inflation concerns persist at the start of the new year, oil remains a focal point for investors given that much of the recent rise in global inflation has been a function of higher oil prices. Oil remains bid this morning with Brent closing in on the $80 per barrel handle ahead of today’s OPEC+ meeting, where it is widely expected to announce another 400k increase in production. The cartel has cut its estimates for an expected first-quarter surplus as demand has remained relatively robust, while there have been some supply disruptions in Libya. OPEC’s joint technical committee sees a surplus of 1.4mn barrels a day for Q1, a cut of roughly 25% compared to its prior estimates. This will allow OPEC to continue with its gradual increase in production without destroying the high prices needed to keep many members of the cartel happy by supporting their government’s books. The announcement shouldn’t be too market-moving, given that it is already priced in.

Rand and International FX Commentary

  • The first trading week of the year starts, and the ZAR is recovering much of its losses. There is no obvious reason for this, although there wasn’t much justification for the ZAR depreciation in the first place. Many of the travel restrictions persist. Emirates and Qatar are still not flying to and from SA in the way that they used to, while Germany is only now lifting the ban on SA travellers. It does seem ludicrous that countries with infection rates and hospitalisations many multiples of SA due to the Omicron variant would keep SA restricted due to the risk of spreading the Omicron variant.
  • Many reports have now been released, raising the prospect that Omicron may well signal the beginning of the end of the pandemic. However, developed market governments are not responding constructively. Instead, they continue to treat Omicron as a major threat, despite acknowledging that hospitals are currently coping, the weaker virulence and milder symptoms. While quoting science as their justification for restrictions, equally sound science points to Omicron being the variant that helps this coronavirus become endemic.
  • As the risks associated with Covid subside and economies are unshackled to perform as they can, global levels of risk aversion will subside. Ironically, this resumption of more normal economic activity might usher in a higher probability of ZAR depreciation through 2022. As domestic demand gradually returns relative to minerals export production and prices, so the tide turns on the trade and the current account. The lower the surplus, the more vulnerable the ZAR finds itself.
  • It is never that clear cut, but in so far as the ZAR is concerned, good news for the economy need not necessarily be good news for the ZAR. As mentioned in many reports through the years, the ZAR tends to perform far better in a weak domestic environment. Any resumption in a credit cycle that holds momentum to boost demand for investment and consumptive goods will inadvertently tilt the cross border flow balance against the ZAR as they encourage imports. The degree of domestic normalisation and the strength of the economy may be unknown, but this relationship is not. Any improvement in economic conditions, therefore, comes with some risk of ZAR volatility. Not immediately, but through the weeks and months ahead.

Nicholas Kabaso

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