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Zambia Market Watch -Zesco plans to to restructure all of its debt

October 22, 2021by Nicholas Kabaso
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Local Market Commentary

  • In an online briefing yesterday, Director of the IMF Africa department Abebe Selassie said that IMF hopes to have a mission to Zambia in the coming weeks, where the parameters of a new financing deal can be agreed and that will facilitate debt restructuring with the nations official and private creditors as soon as possible.  Selassie further said that “this a country that needs official sector support and the in-volvement of the private sector as quickly as possible.”
  • Moody’s will today provide a credit rating status update on Zambia. In April 2020, Moody’s downgraded Zambia’s long-term issuer to Ca from Caa2 and changed the outlook to stable from negative. According to Moody’s, the rating reflected the view that Zambia’s capacity to service its debt had further weakened as weak governance had prevented rapid and decisive policy actions, leading to a substantial dete-rioration of fiscal metrics. There have been many developments since the last rating review. Given the leadership change in Zambia that brought optimism of a swift resolution to its debt challenges, risks exist the Moody’s may adopt a wait and see approach. Note, Moody’s in April 2020 said that smaller losses for private-sector creditors than implied by the Ca rating as part of a debt restructuring could lead to a higher rating.
  • Meanwhile, the Energy Ministry has indicated that Zesco plans to restructure all of the $3.5bn its owes creditors. Zesco Ltd. joins the cen-tral government of what last year became Africa’s first pandemic-era sovereign defaulter in seeking to rearrange dollar debt that’s surged over the past decade. The state last year hired Lazard Freres to advise on negotiations with creditors, and the company’s mandate covers Zesco’s debt too, the ministry said. The ministry added that “these consultants are already working with Zesco on all restructuring pro-cesses. The plan is to restructure all the debt.” The debt includes nearly $1.2 billion of arrears the utility owes to privately-owned power producers that supply the company electricity. Some of Zesco’s biggest creditors also include the Industrial & Commercial Bank of China Ltd., the Export-Import Bank of China, and the Development Bank of Southern Africa.
  • Volatility is almost a given for base metals as investors look to position themselves in relation to the growth dynamics of the bigger econ-omies. China being a major consumer of these metals is certainly either number one or two in terms of influence on prices from a de-mand side depending on who you speak to. Yesterday was a particularly bad day for base metals as concerns about the Chinese economic recovery held focus, copper shed 3.54%, nickel fell 5.05%, zinc 3.83% and aluminium finished the day 5.32% lower.  
  • Meanwhile, Reuters reported the following – Low global supplies of copper – a key metal used in wiring, electric vehicles and other elec-tronics – will crimp global climate ambitions unless regulators green light more mines, the chief executive of Freeport-McMoRan Inc said on Thursday.  The warning comes as global leaders plan to discuss climate mitigation efforts later this month at the COP26 conference, even as some host communities and environmentalists increasingly oppose new mines for so-called strategic metals.
  • Data released yesterday shows that the U.S. economy continues to recover. Weekly jobless claims have now fallen to the lowest levels in 19 months. Continuing claims have fallen a further 122k to 2.481mn while existing home sales have jumped 7% on the month. All in all, it is a strong set of data, which, when combined with the recent earnings outcomes, suggests that the economy is still in the midst of a strong recovery that helps explain the rise in equity markets.
  • New York Fed President Williams has been quoted as saying that although he sees the risk and potential of the property market correct-ing, that he does not see high property prices as a financial stability risk. With the benefit of hindsight, banks are well capitalised and are positioned to weather any difficulties in the market. Furthermore, from a credit cycle perspective, the rise in house prices helps to boost (on paper) the balance sheets of households against which they can borrow in the future. With interest rates as low as they are, the pres-sure on households will remain low and the risk of further property price increases, high.
  • The US PMIs for October are expected to reflect diverging performances within the economy at the start of Q1. The manufacturing PMI likely extended its recent decline from the highs reached in July, while the services PMI is expected to have improved slightly after falling in recent months. On the whole, the U.S. economy remains on a strong footing, although supply bottlenecks and rising prices are a risk to its outlook. In any case, monetary tightening in the U.S. is drawing nearer, meaning the data will likely have limited market-moving poten-tial at this time unless any major shocks are realised.
  • Shifting to the FX markets, the Kwacha remained on the defensive yesterday.  A bias towards minor depreciation is expected to remain next week amid ongoing tight FX liquidity conditions.
  • Into the final trading session of the week and the USD is set for another week of losses despite concerns that the Fed will taper at its No-vember meeting. It seems that investors are well-positioned for this reality and that while the Fed is tapering, so too are other central banks, with some even tightening. While the USD did have a better day yesterday with some strong economic data supporting it, the un-derlying backdrop is still one of large budget and trade deficits. These deficits will always impose some depreciative pressure on the USD, especially if improving risk appetite does not encourage rotation to safety.


Rand and International FX Commentary

  • Risk aversion picked up notably yesterday, with the likes of haven currencies, namely the Japanese Yen, Swiss Franc and US dollar, all bid on the day. Concerns over a potential looming default by China’s Evergrande shaped the sour mood during earlier Asian trade, with con-tagion risks driving losses for riskier assets through the day. Comments from Fed officials complicated the mood, as some reaffirmed that US interest rate hikes would not be occurring any time soon. In contrast, others noted they favoured a tapering of Fed asset purchases as early as next month. The combination of yesterday’s risk-off trading environment and Fed comments ultimately saw the trade-weighted USD steady during the day, ending domestic trading hours flat.
  • Meanwhile, the ZAR was amongst the weakest on the day, losing 1.40% against the USD to close at 14.6200/$. The local currency only fared better than the Turkish Lira in the EM currency sample, which was pressured into a 2.30% loss after the Turkish central bank cut its benchmark repo rate by 2%, twice as much as expected. Overall the souring mood brought the ZAR’s rally to a halt, paring all weekly gains thus far.
  • Overnight, the USD has continued to trade on the front foot, with the reversal in trend gaining in pace in late evening trade. Adding to yesterday’s snap change in market sentiment and further supporting the USD, US initial jobless claims fell to a 19-month low. Despite la-bour shortages slowing hiring dynamics in the US, high-frequency data continues to point to a tightening labour market, albeit slower than what was initially expected. 
  • While the USD has held steady on a trade-weighted basis after its overnight bounce, it is as yet unclear whether the market has reached an inflection point in the greenback’s decline from one-year highs touched a little over a week ago. Furthermore, risk aversion appears to have settled overnight on news that debt-laden Chinese property developer Evergrande has made an interest payment before its 30-day grace period was scheduled to end over the weekend. As a result, most Asian equities have traded up. However, EM currencies have comparatively struggled to regain traction. 
  • The day ahead sees manufacturing PMI data out of Europe and the UK, followed by the US later in the day. Should there be continued signs that supply constraints are weighing on factory production, increasing the potential for more persistent inflation globally, a rebound in risk appetite heading into the weekend could be a tough ask. The day ahead also features a continued panel discussion hosted by the SARB and the BIS, featuring SARB Governor Lesetja Kganyago together with Fed Chairman Jerome Powell, with markets looking for hints on risks to the policy outlook post-pandemic.

Nicholas Kabaso

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