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Zambia Market Watch -Zambia’s talks with the IMF resume today

November 3, 2021by Nicholas Kabaso
Please click here to access the full Market WatchLocal Market Commentary

  • Speaking on Tuesday, Finance Minister Situtmbeko Musokotwane said that Zambia hopes to secure a crucial International Monetary Fund support agreement by the end of November. Musokotwane said told a webinar that “Zambia’s debt problem is a huge problem…. By the end of this month, we should reach a staff-level agreement with the IMF.” Musokotwane also vowed that China and other creditors will be treated the same. Note Zambia’s debt with China has been a major point of contention. Other countries and Zambia’s private sector creditors want more details on that debt and reassurances that Beijing will not get preferential treatment. Musokotwane added that there would also be no separate agreements with Zambian banks and other local creditors the government had run up debts with.
  • Meanwhile, the Finance Minister also said that plans to refinance a $750mn Eurobond that matures in September with money set aside in the 2022 budget may fall away as restructuring talks with external creditors progress. According to Musokotwane, “we put money in the budget to refinance the first Eurobond, but that is not to say that this is actually going to be done. We recognize that if we did so, it means that this particular Eurobond will get favorable treatment compared to everybody else.” Musokotwane added that the provision was made to make sure that the budget recognizes what is pending and how it must be dealt with.
  • The Markit/Stabic PMI data release for October today will likely play second fiddle to the resumption of Zambia’s talks with the IMF. Note last week, Minister Musokotwane pledged to slash its budget deficit and curb borrowing in a bid to secure IMF support. Musokotwane said reducing spending on politically-sensitive subsidies – such as on power, fuel, and farming – was likely to be one of the IMF’s key de-mands.
  • In the base metals complex, the backwardation of the copper market remains entrenched for now as low inventories and supply issues drive the near dated spreads to near record highs. Participants in the futures market are paying huge premiums to roll forward front month contracts, with the spread between the Nov and Dec contracts widening to $275/tonne by the close of business on Monday. This has since eased to $160/tonne as of yesterday’s close but shows that the pressure is far from over.
  • Longer term the outlook for copper looks less favourable as China’s economic woes unfold. To be clear we don’t expect a wholesale col-lapse in the copper price, but we do expect prices to remain contained as this unfolds. Structurally we remain copper bulls as the decar-bonisation of the world is the macro factor which will underpin the red metal for decades to come.
  • It will be a busy data session in the U.S. that precedes the all-important FOMC decision. The first of the three labour market stats will be released today in the form of the ADP data for Oct. While there has been a discrepancy between the ADP employment data and the offi-cial nonfarm payrolls data in recent months, the ADP print is still a valuable gauge of labour dynamics in the U.S. Although much of the fo-cus today will rest on the FOMC rate decision and the payrolls print on Friday, traders should still keep an eye on the ADP report as it has the potential to result in some price action, especially if the data surprises. Consensus expectations suggest that the U.S. private sector added 400k jobs in October compared to 568k jobs in September.
  • Given the sensitivity of financial markets to monetary policy and taper fears, all eyes will be on the FOMC’s rate decision and its reaction to persistently strong inflation. It is widely expected that the Fed will begin to lift its foot off the stimulus pedal by winding down its bond-buying program, which is currently running at $120bn a month. Commentary from Fed officials has been mixed in recent weeks, with some officials speaking with a hawkish tone, while others have shown signs that they are willing to give inflation a longer leash given that the economic recovery remains fragile. Ahead of the meeting, it is important to note that if the Fed does begin tapering, it is merely eas-ing the amount of stimulus injected into the economy. Monetary policy will remain accommodative in the months ahead, with the first-rate hikes only seen at the end of next year or early 2023. That said, we expect the broader bear flattening bias to persist across global bond curves as inflation continues to run hot.
  • In the FX markets, there has not been much change through yesterday’s trading session, with investors treading water ahead of the la-bour data and the FOMC decision later today. The USD remains somewhat supported ahead of the FOMC meeting and the anticipated taper, but any dovish talk will see that rapidly unwind. Any fresh breakout of the current range will happen after the FOMC statement, which will offer perspective on how sensitive the FOMC will be to inflation. Meanwhile, a bearish bias remains entrenched on the Zambia Kwacha amid scares US dollar liquidity conditions. 

 

Rand and International FX Commentary

  • ZAR depreciation persisted through the past six working days, depreciating eight days out of the previous nine. There are various reasons for this, ranging from the recovery in domestic demand and the retreat in SA’s terms of trade that detracted from the trade surplus, to the resumption of load shedding. Furthermore, some key risk events such as the elections, the medium-term budget and the SARB’s next MPC meeting were hurdles to overcome. 
  • However, while the retreat in SA’s terms-of-trade from multi-year highs is certainly an important factor, they remain very buoyant, with commodity prices still well elevated. Furthermore, while load shedding is huge counter-productive and detracts from risk appetite to-wards SA, SA just signed a new green funding deal to assist in electricity production reforms and the shift towards greener energy away from coal. Additionally, according to the latest local election outcomes, the ANC has lost even more support, implying that the political landscape has finally changed away from a single party-dominated state that will hopefully usher in a new phase of accountability. Finally, the latest government finance stats show that SA has done far better than expected concerning tax collections, and the Medium Term Budget will attest to that next week.
  • Therefore, it is not an entirely bearish scenario for the ZAR. It is questionable whether the depreciation seen recently is entirely warrant-ed. Instead, the latest bout of depreciation could be nothing more than an adjustment to price in risks related to central banking devel-opments that will unfold abroad as the Fed and BoE decisions come into focus through the two trading sessions, starting with the FOMC statement this afternoon.  How these influential central banks behave will influence the way many emerging market central banks re-spond. Most emerging markets will need to re-establish healthy yield spreads above their developed market trading partners to ensure their currencies retain healthy two-way flow. That will always lead to periods of volatility.
  • So while the domestic All-Economy Standard Bank PMI will be released today and hold some interest, it will be overlooked in favour of the US labour and service sector data this afternoon, followed by the all-important FOMC decision and guidance. Position-taking will be kept contained ahead of such an important event.

Nicholas Kabaso

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