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Zambia Market Watch -Zambia’s agricultural sector to benefit from deal with the European Investment Bank

October 11, 2021by Nicholas Kabaso0
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Local Market Commentary

  • Speaking to lawmakers on Friday, Energy Minister Peter Kapala said that Zambia is planning to renegotiate a bulk power-supply agree-ment with Copperbelt Energy Corp. once the lawsuit against the government is concluded. According to Kapala, “We’ll be discussing with CEC, but we can’t go further because there’s a court case against the government, which we should be able to resolve before the end of the year, and the bulk power purchase agreement will be renegotiated so that the people of Zambia benefit.”
  • Meanwhile, the European Bank announced that Zambia and the bank have signed an $18mn credit line for a new $36mn initiative to ac-celerate agricultural investment in the country. According to the bank,  the new initiative, which aims to increase access to finance, sup-port job creation, and enhance agricultural productivity, will be managed by the Zambia National Commercial Bank (Zanaco) and backed by the European Union and EIB bank. CEO of Zanaco Mukwandi Chibesakunda sees the partnership as unlocking agricultural investments, creating employment and promoting economic growth in Zambia in the years ahead.
  • Copper prices nudged a little weaker on expectations that the Fed would continue to taper despite the weaker than anticipated non-farm payrolls data. At this point, concerns about high electricity prices and the impact this might have on energy-intensive sectors do not ap-pear to have influenced expectations for supply but could in the future, just as it has other industries.
  • In Peru, protests against Glencore’s  Antapaccay mine were suspended on Friday as the mine sought a new agreement with residents. The community indicated that new infrastructure works would be commenced and that the mine would acknowledge the environmental damage it has caused and look for ways to prevent that from continuing. This will reduce any concerns that this will impact copper supply.
  • Moving over to the US,  with nothing in the way of data today, investors will have plenty of time to reflect on the outcome of Friday’s pay-rolls numbers. They were disappointing and missed even the most bearish of expectations. It runs against the theme of the steadily im-proving labour market and argues instead for a more sensitive approach from the Fed. Specifically, the U.S. economy added 194K jobs in September, the lowest this year and well below forecasts of 500K. The latest reading compares with a revised reading of 366K in August (prior: 235K).
  • In contrast, the unemployment rate dropped to 4.8%, the lowest since March 2020, and bettered consensus expectations of a less pro-nounced decline to 5.1% from 5.2% in the month prior. This was, however, partly driven by a drop in the participation rate. Overall, the U.S. added fewer jobs than forecast for a second straight month in September. This risks not satisfying the Federal Reserve’s “substantial further progress” criteria for labour market improvement, indicating the central bank could delay its plan to begin tapering asset purchas-es year-end.
  • In response, San Francisco Fed President Daly indicated that it was too soon to conclude that the job market recovery was stalling. She as-cribed much of the deviation from expectations to the prevalence of the delta variant and the impact that it had had on business and household confidence levels. Businesses are inclined to make do with what they have for as long as possible so as not to carry unneces-sary overheads at a time when business conditions have not yet fully normalised, and the risk of further restrictions remains a real threat.
  • Treasury Secretary Yellen confirmed that the U.S. would seek to ratify a global minimum tax for corporates and expressed her confidence that Congress would pass the bill on the fiscal front. One hundred thirty-six countries agreed on Friday on the global minimum corporate tax rate. Politically, this will be a well-supported initiative as it seeks to tackle large multinationals that circumvent tax legislation. It also comes at a time when governments are searching for new sources of tax revenues.
  • In the FX markets,  a bearish bias is expected to persist on the Zambian Kwacha this week as demand for hard currency continues to out-weigh supply. Surprisingly, the impact of the payrolls release on the USD was minimal. Despite US Treasury yields rising and risk appetite falling, the USD has not gained more traction. That might follow through the week ahead as investors digest the possibility that higher US Treasury yields will mean more pressure on emerging market and other higher risk investments. It would appear that investors have tak-en note of the upward revision to the previous payrolls data and remain convinced that the Fed will continue to taper, come November.

 

Rand and International FX Commentary

  • Cautious trade in currency markets persisted into the end of last week, while the anticipated US September jobs reports did little to en-courage clearer direction. US hiring dynamics fared worse than expected in September, with the headline nonfarm payrolls figures show-ing 194k jobs were added compared to expectations for 500k, a significant downside surprised considering solid private payrolls figures earlier in the week. While the USD took an initial hit post the jobs report release, further details softened the blow and saw the USD pare losses later in the US session. Specifically, August’s jobs gains were revised higher from 235k to 366k and the unemployment rate dropped to its lowest since March 2020 at 4.8%, although partly driven by a drop in the labour force participation rate. 
  • As for the local currency, the ZAR remains highly sensitive to external sentiment and the outlook for US Fed policy tightening. After strengthening to a two-week high of 14.7800/$ in intraday trade, the local unit was whipsawed into the end of the domestic session as the USD regained its footing. While the ZAR managed to end the day marginally stronger than the previous close at 14.9200/$, it failed to hold onto gains over the last two sessions, which saw the currency end the week 0.30% weaker than where it began.
  • Despite the weaker US jobs report, it is unlikely to dissuade hawkish Fed members nor market participants that the US central bank will need to begin reducing its monthly asset purchases before year-end. Inflation remains a concern that the Fed will need to deal with, and tolerating higher prices for too long while aiming for full reemployment will open the door for consequences further down the line. The ultimate impact for emerging markets lies with the end of highly accommodative policies in developed nations. Lower DM rates have re-sulted in cash-flush investors seeking a higher return on capital in developing countries. As DM rates begin to rise again on expectations of reduced central bank asset purchases and subsequent rate hikes, emerging markets run the risk of capital outflows, resulting in potential currency depreciation. 
  • While this remains a medium-term risk for emerging markets, with the timeline for global DM policy tightening remaining unclear, chang-es to the outlook holds the potential to bias sentiment towards or against EM currencies in the near term. As for the week ahead, mar-kets get notable updates on the US inflation front and Fed FOMC meeting minutes, both due Wednesday. Domestically, the data card heats up with the SACCI business confidence index today, followed by mining and manufacturing production and retail sales later in the week. In the spot markets, sentiment has kicked off the new week mixed for EM currencies. The ZAR is currently leading EM currency laggards during the Asian trading session, having traded 0.50% weaker to arrive at the 15.0000/$-handle. For the day ahead, it seems little may come in the way of the USD, which remains supported by higher Treasury yields. Domestic markets may also get off to a less buoyant start after the announcement at the end of last week that stage 2 load shedding will persist until Thursday.Cautious trade in currency markets persisted into the end of last week, while the anticipated US September jobs reports did little to en-courage clearer direction. US hiring dynamics fared worse than expected in September, with the headline nonfarm payrolls figures show-ing 194k jobs were added compared to expectations for 500k, a significant downside surprised considering solid private payrolls figures earlier in the week. While the USD took an initial hit post the jobs report release, further details softened the blow and saw the USD pare losses later in the US session. Specifically, August’s jobs gains were revised higher from 235k to 366k and the unemployment rate dropped to its lowest since March 2020 at 4.8%, although partly driven by a drop in the labour force participation rate. 
  • As for the local currency, the ZAR remains highly sensitive to external sentiment and the outlook for US Fed policy tightening. After strengthening to a two-week high of 14.7800/$ in intraday trade, the local unit was whipsawed into the end of the domestic session as the USD regained its footing. While the ZAR managed to end the day marginally stronger than the previous close at 14.9200/$, it failed to hold onto gains over the last two sessions, which saw the currency end the week 0.30% weaker than where it began.
  • Despite the weaker US jobs report, it is unlikely to dissuade hawkish Fed members nor market participants that the US central bank will need to begin reducing its monthly asset purchases before year-end. Inflation remains a concern that the Fed will need to deal with, and tolerating higher prices for too long while aiming for full reemployment will open the door for consequences further down the line. The ultimate impact for emerging markets lies with the end of highly accommodative policies in developed nations. Lower DM rates have re-sulted in cash-flush investors seeking a higher return on capital in developing countries. As DM rates begin to rise again on expectations of reduced central bank asset purchases and subsequent rate hikes, emerging markets run the risk of capital outflows, resulting in potential currency depreciation. 
  • While this remains a medium-term risk for emerging markets, with the timeline for global DM policy tightening remaining unclear, chang-es to the outlook holds the potential to bias sentiment towards or against EM currencies in the near term. As for the week ahead, mar-kets get notable updates on the US inflation front and Fed FOMC meeting minutes, both due Wednesday. Domestically, the data card heats up with the SACCI business confidence index today, followed by mining and manufacturing production and retail sales later in the week. In the spot markets, sentiment has kicked off the new week mixed for EM currencies. The ZAR is currently leading EM currency laggards during the Asian trading session, having traded 0.50% weaker to arrive at the 15.0000/$-handle. For the day ahead, it seems little may come in the way of the USD, which remains supported by higher Treasury yields. Domestic markets may also get off to a less buoyant start after the announcement at the end of last week that stage 2 load shedding will persist until Thursday.

Nicholas Kabaso

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