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Zambia Market Watch – Zambia’s anti-corruption drive gathers momentum

December 10, 2021by Nicholas Kabaso
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Local Market Commentary

  • In the latest sign that Zambia’s anti-corruption drive is gathering momentum under the Hichilema administration, Zambia has arrested three former managers at a state-owned firm for suspected corrupt practices involving over ZMW 300mn ($18.75mn), which forced donors to temporarily freeze aid. Zambia’s anti-corruption commission and the anti-money laundering unit said they arrested former Zambia Postal Services Corporation Postmaster General Macpherson Chanda, 47, and two others for corruption committed between Jan. 2017 and Dec. 2018. Note, Britain, Finland, and Sweden withheld nearly $34mn in aid to Zambia’s social cash welfare and education sectors in 2018 because of concern over financial mismanagement. Their arrest follows that of former foreign minister Joseph Malanji, who was taken into custody on Tuesday for alleged possession of property suspected to be proceeds of crime.
  • This morning we have a pretty muted Asian session for base metals. 3m LME copper is presently trading 0.2% lower on the day with investors concerned about the Chinese economy and equally worried about a CPI print which causes a rise in the value of the dollar.
  • According to a Bloomberg poll inflation in the US accelerated further in November. Consensus expectations suggest that inflation likely rose to a multi-year high of 6.7% y/y in November from 6.2% y/y in October. Concerningly, high inflation looks set to persist as demand in the US recovers against the back of a sustained rise in food costs and elevated commodity prices. This had led Fed members to adopt a more hawkish rhetoric, with Fed Chair Powell hinting at the possibility of a faster pace of policy normalisation. It is now widely expected that the Fed will wind up its asset purchase program by the end of H1 2022, with the first rate hikes seen as early as July.
  • After rebounding in the first half of the year on the back of optimism over the vaccine rollout and reopening of the economy, US consumer confidence cratered in H2. Reflecting this, the Michigan consumer confidence index dropped to a decadal low of 67.4 in November, as negativity over red-hot inflation eclipsed positivity from a strong labour market recovery. Mounting price pressures will remain the focal point for consumers in the near term, while the emergence of the new Omicron COVID-19 variant and tightening monetary conditions will also keep sentiment anchored.
  • Finally, the data day will also include an update on the Federal government’s fiscal position. Although the US monthly budget deficit has tightened notably since the peak of the pandemic, the country is still running a massive fiscal shortfall. Given all the promises being made by the current administration, we expect to see another year of spending far outpacing revenue, even if not all of the proposed stimulus and investment packages get approved in their current form. These deficits may not be a major concern right now, but, longer-term, they will certainly exert pressure on the USD, especially given the US’s massive trade deficit which is also expected to widen over the months ahead.
  • Into the final trading session of the week and the USD is a bit of a mixed bag, not reflecting any significant directional momentum, one way or another. The upcoming inflation data may be the cause for some of this uncertainty as investors wait for guidance on what the Fed might do concerning its taper timeline. A higher-than-expected reading will almost certainly give rise to an earlier taper, although that also needs to be weighed against how much has already been priced in. The risk in this data is and has been that it surprises to the topside. Ahead of the weekend, this implies some volatility may be in store.
  • Meanwhile, Kwacha bulls remained in control yesterday, with the local unit advancing for the fourth straight session. The bullish bias on the Zambian Kwacha is expected to persist next week on the back of positive sentiment on news of preliminary understanding between the IMF and Zambia for an aid programme.

Rand and International FX Commentary

  • As positive as the trading session on Wed was, yesterday was the opposite and more than unwound the gains earlier in the week. In the news, the Omicron variant now appears to be sweeping through SA rapidly with over 22k infections confirmed yesterday. Although symptoms are mild, the sheer volume of people getting sick may translate into a rise in hospitalisation. The threat of greater restrictions or mandatory vaccinations is now being priced in as the country tries to avoid implementing restrictions that further damage a fragile economy.
  • On that point, manufacturing production dropped notably in October, contracting 8.9% y/y from a downwardly revised 0.7% y/y increase in September (prior: 1.3%), reflecting the adverse impact of the ongoing supply-side bottlenecks, return of load shedding, and the three-week strike by steelworkers. The latest print missed expectations of a less pronounced contraction of 1.6% anticipated by analysts surveyed by Bloomberg and also marked the worst performance since August last year. Meanwhile, m/m, manufacturing output swung from an expansion of 3.0% in September to a contraction of 5.9%. 
  • Had it not been for the mining sector surprising to the topside, this would have been a bad data day for SA, with the impacts felt broadly. SA’s mining production surprised to the upside in October, swinging into an expansion of 3.4% m/m from a downwardly revised contraction of 4.4% m/m in September. This is notably the most substantial rebound in mining activity this year on a month-to-month basis and keeps output back around pre-pandemic levels. Mining production also rebounded convincingly on a y/y basis, coming in at 2.1% in October versus a 0.8% contraction in the month prior.  
  • The marked improvement in mining growth can be attributed to an increase in mining of PGMs, chromium and iron ore output, supported by the buoyancy in global commodity prices and the easing of lockdown restrictions during the measurement period concerned. Surprisingly, the sector remained resilient to the downing of tools amid ongoing strike action at some mining facilities, renewed power outages and persistently weak investment activity. That said, the latest figures are still receiving some support from base effects. As these unwind, growth within the sector is likely to peter out.
  • This highlights the importance of SA’s terms of trade, which are not as strong as they were at the start of the year. Oil prices rising and commodity prices retreating, albeit from buoyant levels, on the threat that Omicron poses to growth, is not a good combination for the ZAR. The IMF recently warned SA not to rely on commodity prices to remain buoyant indefinitely to generate growth and focus on reforms. However, it is questionable whether such reforms will come soon enough to prevent the ZAR from losing ground over the next 6-9 months.

Nicholas Kabaso

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