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Zambia Market Watch – ZMW outperforming African peers

April 11, 2022by Nicholas Kabaso
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  • Following on from comments by UK Minister to Africa Vicky Ford last Thursday that Zambia’s debt revamp is being delayed by a single foreign creditor, reports on Friday suggest that creditor is China. China is reportedly reluctant to support Zambia’s IMF programme and therefore is slowing the process, according to government officials. Note that out of Zambia’s total $17.3bn of external public-sector debt, commercial and state-owned Chinese lenders account for $5.5bn, making the nation by far the biggest source of Zambia’s loans, according to Finance Ministry data. Last week, rating agency Fitch warned that disagreements among official creditors or prolonged negotiations with private lenders could delay an eventual restructuring deal and IMF approval into the second half of this year or even into 2023.
  • The Zambian Kwacha has had a strong start to April, with the local currency having all but erased last month’s losses. For context, the Kwacha has gained around 3.22% on a month-to-date basis against the USD and is ranked as the best performing African currency among those tracked by Bloomberg. The Kwacha’s gains are more than triple that of the second best-performing currency, the South African Rand (+1.07%). 
  • The reversal in the Kwacha’s performance can be in part attributed to the central bank’s support. The Bank of Zambia (BoZ) has injected some liquidity to cover strategic demand pipelines in recent weeks. As the BoZ continues to steadily offload dollars in the market, ensuring there is enough liquidity to meet current demand, the Kwacha is set to remain supported in the near-term. 
  • While the near-term outlook remains favourable for the Kwacha, it is worth noting that the Kwacha remains on the back foot on a year-to-date basis, down by almost 5%. Going forward, aside from central bank intervention,  the finalisation of the International Monetary Fund programme will also be key to the local currency’s performance. Approval of the programme could provide some fresh impetus for the Kwacha and potentially see it potentially erase those year-to-date losses and rally further. However, a potential delay in the programme suggests Zambia’s fragile fiscal position will remain a headwind for the local currency.
  • The narrative at the start of the week is unchanged. Concerns over Chinese demand given the COVID-19 lockdown’s and tighter monetary policy from the United States are the macro drivers at present, both of these have caged the bulls and sent metals lower for the most part. 
  • 3m LME aluminium is currently trading just over 1% lower on the session at $3332.00/tonne while 3m copper has dipped by 0.57% at the time of writing changing hands at $10265.00/tonne.
  • Last week was a strong week for the USD that consolidated its gains at much higher levels. Tough talk from the Fed has resulted in UST yields surging higher. That, combined with some data out of the U.S. that still points to a resilient economy, was enough to boost the USD and keep its support intact ahead of the weekend. This morning, there is a rise in risk aversion as global equity markets come under pressure, and the USD will likely retain some support. The EUR’s attempts to recover against the USD have failed, with the pair still trading below 1.0900, while the GBP is now on the defensive, looking to retest prior lows seen in mid-March around 1.3000, a break of which could see the GBP under further pressure this week.


Rand and International FX Commentary

  • Friday saw a dramatic end to the trading session, with the USD-ZAR dropping back some 10-15 cents in the final minutes of the trading session to take the wind out of any USD bulls that may have been looking for an extension of the week’s move. It may simply be that the market was positioned too far in one direction ahead of the weekend and a shortened trading week that made people uncomfortable to hold a position over the weekend. However, it may also reflect how SA’s carry attractiveness will also support it going forward and that the ZAR’s current overvalued position does not necessarily guarantee an inflexion point is imminent.
  • However, developments over the weekend will test the carry traders’ resolve. Clearly, not all South Africans have learnt their lesson concerning corruption, as the ANC branch in eThekwini elected corruption-accused Zandile Gumede to chair of the eThekwini region. She will step aside as per the ANC rules while her case plays out, but the election offered evidence of just how tainted ANC branches still are and that Ramaphosa still has a strong factional war to fight within his own party. Such battles will shape the ANC’s elective conference outcome at the end of the year. For the time being, Ramaphosa is the favourite to remain in power and push ahead with his reformist agenda, but it will not be without its challenges. On another note, former President Zuma is determined not to go down without a fight and plans to prosecute NPA prosecutor Billy Downer privately for leaking information to the media. Zuma is scheduled to appear in the Pietermaritzburg High Court today
  • Turning our attention to the shortened week ahead, position-taking in SA markets may be kept to a minimum. Investors look forward to local retail sales figures and developments in the High Court, where the NPA is scheduled to argue for the admission of new evidence that has come to light in the Zuma-Thales corruption trial. These developments are more likely to generate interest than they will be market-moving but will still capture headlines nonetheless. 
  • Concerning market-moving developments, the war in Ukraine continues to roll on and always holds the potential to surprise. Inflation out of China has spooked markets, and equities are on the defensive this morning to raise overall levels of risk aversion. The oil price is threatening to break below $100pb, which is encouraging, but US Treasury yields continue to march higher in response to the Fed’s hawkish guidance. There are a lot of crosswinds blowing, and clear direction is difficult this morning. On balance, there are still plenty of reasons for the ZAR to remain resilient

Nicholas Kabaso

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