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Zambia Market Watch -Zambia’s targets IMF deal by the end of November

November 1, 2021by Nicholas Kabaso
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Local Market Commentary

  • On Friday, Zambia was back in the spotlight with Finance Minister Situmbeko Musokotwane presenting the 2022 budget to parliament. In a bid to return to a sustainable fiscal path, the Finance Minister said the aim was to reduce the budget deficit from a projected 10.4% of GDP this year to no more than 6.7% next year. Musokotwane added that the government targets economic growth of at least 3.5% in 2022 compared to 3.3% in 2021. The Finance Minister said that the government is targeting large-scale agriculture estates to boost growth.
  • In a move to boost foreign investment into Zambia, the Finance Minister said he planned to reintroduce the deductibility of mineral royal-ty payments when calculating corporate income tax. Recall that mining investors have been calling for this reform for a while now. Finance Minister Musokotwane noted that “renewed interest from investors today could lead to new mines in production over the next five to ten years, and with the right supportive policies in place, that could completely change our nation’s development trajectory.”
  • Coming as music to the ears of fiscal hawks, Musokotwane said the government would not contract any external non-concessional loans, except for refinancing purposes, adding that the government-subsidized fuel supply chain would be restructured. The Finance Minister said that the government is pushing to secure a much-needed deal with the International Monetary Fund. Musokotwane said, “I urge this house and the nation at large to rally together and support the government to reach an agreement with the IMF by the end of Novem-ber,” while stating that “there is no option to this otherwise the debts we owe will choke this nation to a standstill.”
  • Going forward, the Zambian government aims to conclude the debt restructuring in the first quarter of 2022. Commenting on the matter in an interview on Sunday, the Finance Minister said that Zambia’s $2.4 billion borrowing requirement for its 2022 financial year includes $750mn, which will be used to repay its Eurobond that is due next year. Note that Zambia’s external public debt stood at $14.71bn at the end of September. Musokotwane “don’t expect that borrowing is just going to stop. Of course, there are some projects that were start-ed earlier on that can’t just stop. Then also, there is room to borrow a little bit more on concessional borrowing.”
  • From a financial market perspective, Zambian Eurobond yields continued to trade lower on Friday. The shorter-dated 2022 Eurobond yield fell 18bps to 37.69%, while the longer-dated 2027 shed 12bps to end the session at 13.83%. While the movements on the day were nota-ble, it is worth mentioning that much of the positive fiscal and political news is already priced in. Investors will now be watching to see if the government sticks to its fiscal reform agenda and whether it is indeed able to secure a deal with the IMF. This would provide a second wind to Zambian bonds in the months ahead.
  • On the mining front, Vedanta Resources has reportedly said that it would fight any effort by the Zambian government to sell its subsidiary Konkola Copper Mines (KCM) to third-party buyers. Vedanta told Reuters that “it would take all necessary steps” to protect its interests in KCM. The mining major said that any potential buyer of the KCM assets would be subject to an unlawful act because the Zambian court al-ready ordered last month to halt any proceedings related to the liquidation of KCM assets. According to the news agency, ZCCM-IH plans to appeal the court ruling in favour of Vedanta.
  • The broader base metals complex started the month on a better footing even as the official Chinese manufacturing purchasing managers index held below the 50 mark for a second straight month indicating an economy which is struggling with supply chain bottleneck’s, re-peated COVID-19 outbreaks and a property sector that could be described as shaky at best.   
  • Copper traders will equally be focusing on developments in Peru where supplies are being threatened as a result of protest action. Reu-ters reported yesterday – Peru’s Antamina copper and zinc mine, part-owned by Glencore and BHP Billiton, said on Sunday it had sus-pended operations due to roadblocks established by demonstrators who say the mine has not lived up to its commitments to support lo-cal communities. The company issued a statement saying it was not safe for its employees to keep working while the protests continue. 
  • The USD experienced a strong bounce on Friday following the Core PCE data and inflation information related to wages. It seems that wage inflation is gaining momentum on a q/q basis as the labour market tightens up. What was an inflation spike in the worker category has now spread, giving rise to expectations that inflation may prove more permanent than first anticipated. It implies that the FOMC will have little choice but to head down the route of removing stimulus or risk inflation expectations becoming more entrenched.
  • This week will be an important week on both of those fronts. The all-important labour data will be released later this week to offer fur-ther perspective on the labour market’s recovery. Preceding that data will, of course, be the FOMC, which will rank as one of the most important on record, given that the market anticipates a decision on tapering. For now, the combination has investors trading cautiously and positioning for a strong result that will justify the Fed’s shift in stance.
  • It is an important week for the USD. Arguably more important than the labour data this month will be the outcome of the FOMC decision and the guidance the Fed offers. A taper tantrum is avoidable with transparency and forecasts of an economy that will continue to ex-pand beyond the taper. However, the risk of volatility is higher, and the probability of a tightening or removal of excess monetary capacity is higher than ever. Inflation in the U.S. is buoyant, and the labour market is tightening, which gives the Fed very little option but to start. In removing stimulus, the Fed will support the USD.

 

Rand and International FX Commentary

  • The day ahead sees South Africa out for a public holiday as a result of the municipal elections. Currently we have the USD-ZAR trading weaker with flow on the thin side as local participation is lacking, the local unit is marking time around the R15.25 mark with only the INR is trading weaker at 0.46% down on the Asian session.

Nicholas Kabaso

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