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Local Market Commentary
- Zambia’s Markit/Stanbic PMI climbed above the 50-point neutral mark for the first time since April, signalling an improvement in business conditions in September. An appreciation in the Kwacha in part helped business conditions improve. Moreover, survey results show that new orders and employment growth was sustained, while output neared stabilisation. On the price front, both input costs and output charges decreased. Meanwhile, business confidence reached the highest since the onset of the coronavirus pandemic. Looking ahead, the lifting of lockdown restrictions in Zambia, in addition to a broader bullish bias on the Kwacha, suggests that private sector conditions may continue to improve in the coming months.
- Zambia’s fiscal dynamics are back in the spotlight. This comes after Finance Minister Situmbeko Musokotwane told Parliament on Tuesday that Zambia’s external debt is at least 12% higher than previously expected. The Finance Minister said that Zambia’s total external debt stood at $14.4bn at the end of June, much higher than the earlier figure of $12.91bn.
- The Finance Minister’s revelations on Tuesday sparked a wave of fresh fears about Zambia’s precarious fiscal position and was the latest sign of a worsening debt crisis. Recall that Zambia became the first African nation to default during the COVID-19 era, with the govern-ment failing to make an interest payment on its debt at the end of last year. While Zambia defaulted late last year, the government is en-gaging in talks with creditors to restructure its ballooning debt. Commenting on the country’s soaring debt pile, Finance Minister Muso-kotwane said that Zambia’s debt has grown uncontrollably since 2012, adding that year in year out, borrowing has been spiralling out of control even when each year, there were promises made to manage the national financial resources more prudently.
- Over the past decade, the bulk of Zambia’s lending has been from Chinese lenders to fund infrastructure projects, including roads and railways. This has resulted in massive fiscal deficits and a blowout in Zambia’s debt, which has led to the underperformance of domestic assets in recent years, a spike in inflation, and stagflation. That said, hopes that President Hakainde Hichilema is committed to righting the country and reining in Zambia’s massive debt pile has resulted in a significant correction in domestic assets in recent months.
- The big question now for the outlook for Zambian markets is whether the Hichilema administration will stick to its reform promises and implement prudent fiscal policy. Going forward, we see two scenarios playing out. Firstly the government pushes ahead with fiscal re-forms and steers the country’s debt to a sustainable path, which should see the broader bullish bias in Zambian assets persist. Secondly, the government fails to deliver on its promises to adopt prudent fiscal policy and the recent gains in Zambian bonds and the Kwacha are unwound. Note that Zambia also faces the risk of a spiller over from the cracks emerging in the Chinese economy, which will dent the out-look for copper, the country’s primary source of fiscal revenue and foreign currency. Another factor to keep an eye on is whether the government can secure a much-needed IMF loan. Finance Minister Musokotwane said he is hopeful that Zambia will secure an IMF loan by the first quarter of 2022.
- In the US, news released this morning is that President Biden has reportedly held talks with Chinese President Xi Jinping, and both coun-tries have decided to abide by the Taiwan agreement. This may help defuse some of the tensions that have arisen between Taipei and Beijing. The agreement sees the U.S. recognise Beijing as the capital and has established diplomatic ties with China through Beijing as op-posed to Taiwan on condition that the future of Taiwan is achieved through peaceful means. At least on this political front, tensions could subside.
- However, these discussions did not cover existing trade issues between the two countries. China still enjoys a surplus of around $30bn per month to the U.S., although it is important to note that the massive explosion in the trade deficit was not with China but the rest of the world. In trying to tackle the trade deficit through trade negotiations, U.S. authorities miss the most obvious driver of the deficit: the very strong credit cycle and the demand in the U.S. that far outstrips production and supply. The best way to fix the deficit is to raise the productive capacity that will take decades, or reduce consumption.
- In the FX markets, the Kwacha remained on the defensive yesterday as demand for hard currency stays higher than supply. Meanwhile, the USD is back on the front foot ahead of the labour data, which begins today and ends with the payrolls figures on Friday. Anticipated monetary policy changes and interest rate expectations are once again playing a role in driving currency direction, and any data that al-ludes to a rise in interest rates or yields will support the USD. Underlying momentum for the USD appears to be constrained, with inves-tors remaining cautious, but any further rise in UST yields will likely see the USD gain further traction.
Rand and International FX Commentary
- Emerging market currencies were under sustained pressure yesterday, with riskier currencies shrugging off gains seen in major equity benchmarks. FX markets were generally risk-off as concerns over China’s Evergrande crisis deepened, leaving investors worried that it would have negative consequences for global growth. Meanwhile, US inflationary pressures continue to support expectations for the be-ginning of Fed policy normalisation this year. US Treasury yields resumed their advance yesterday and led the USD to receive most safe-haven bids. Despite this and SA’s exposure to China’s potential growth slowdown, the ZAR managed to swing prior losses following the SARB’s bi-annual monetary policy review released yesterday afternoon, which painted an overall more hawkish outlook. The ZAR ulti-mately led EM currencies on the day, gaining 0.35% to close at the 15.0000/$-handle.
- Domestic data also offered some support to the ZAR yesterday as the Standard Bank PMI rebounded back above the 50-neutral mark, coming in at 50.7 versus 49.9 in August. According to details from the IHS Markit survey, the upturn in the private-sector gauge was mainly led by increases in output and new orders. Firms were also more optimistic about the future, with business expectations for the coming year climbing to their strongest level since July. Add to this the move to level one COVID-19 restrictions, and it suggests the private sector economy is likely to continue recovering in the coming months. However, the ongoing recovery would not be without risks. Supply short-ages and unreliable electricity supply will continue to hinder output at firms, while rising input prices and structural constraints will contin-ue to squeeze profit margins.
- In its bi-annual review released yesterday afternoon, the SARB warned of stronger underlying price pressures due to the stronger than expected recovery in the first half of the year and. It noted that delaying rate hikes could destabilise current CPI expectations and see the central bank playing catch-up with inflation. Furthermore, the central bank reiterated monetary policy’s limited ability in influencing gross domestic product, stressing that structural reforms are needed to lift SA’s growth potential. Overall, the hawkish comments supported the ZAR in intraday trade yesterday, but support going forward ultimately depends on SARB action. The SARB also noted that falling com-modity prices would present greater fiscal risks, in that SA mistakes the current commodity cycle as a sustained cycle.
- Over to the spot markets, the ZAR has led EM currencies weaker in early morning Asian trade, erasing all of yesterday’s gains overnight. The USD has remained on the front foot after yesterday’s uptick in Treasury yields, with the greenback likely to maintain support into the end of the week as key US payrolls data looms. The day ahead sees US private payrolls data which is often a precursor to the official jobs report due Friday. A surprise print to the topside should lend the USD a tailwind into the end of the week. However, a slightly weaker than expected reading will unlikely hurt the USD too much at this stage, given US inflation expectations and the overall risk-off backdrop.