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Zambia Market Watch –  ZMW remains the best performing African currency

December 8, 2021by Nicholas Kabaso
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Local Market Commentary

  • While the Zambian Kwacha is Africa’s best performing currency in 2021, following a post-election rally, the currency has come under modest selling pressure in recent weeks. Since its lows in August, where the USD-ZMW reached a low of 15.8625, the pair has trended higher, climbing to  17.8522 at the close of last week, marking a more than 12% loss in the Zambian Kwacha.
  • The ZMW has managed to snap its recent losing streak this week, with the currency gaining for a second straight session on Tuesday, bringing the gains in the ZMW for the week to more than 1.80% against the USD. The appreciation in the ZMW this week comes on the back of the positive developments relating to the program with the International Monetary Fund.
  • Recall that on Friday, the IMF said that it had reached a staff-level agreement on an extended credit facility arrangement with the Zambian government, something investors have been eagerly waiting for. While the developments so far have boosted investor confidence, there is still some work to be done before Zambia secures the much-needed program with the IMF.
  • The IMF said in a statement released at the start of the week that Zambia will need to undergo comprehensive debt restructuring under the G20 common framework before the IMF’s executive board will approve the three-year long extended credit facility, which will provide the country with around $1.4bn in financial aid. While there are a number of significant headwinds still present, the outlook for the ZMW is improving.
  • Local news flow is packed with comments surrounding the removal of the energy subsidies as a condition for the IMF bailout. Some are dead against it, while some are pointing to the strong need for reform. Lusaka Times reported the following overnight- An Energy Expert Johnstone Chikwanda has backed the government’s decision to remove subsidies on fuel and electricity in 2022. Mr. Chikwanda says he supports the decision because subsidies at the current size and the rate at which they are expanding will destabilize and cause heavy dislocations to the 2022 national budget performance. He says the level of subsidies will make rebuilding the economy difficult. Mr. Chikwanda told ZNBC News in an interview that the country will fail to attract major investors in the oil industry if the subsidies are maintained. He has appealed to different stakeholders to support government reforms in the energy sector as they are well intended and keeping the subsidies is not sustainable.
  • Keeping with energy, Oil kept up its rally yesterday, posting another gain of over 3% as it continued to recover from the slump driven by the initial Omicron concerns.  This morning, however, we have both the Brent and WTI front-month benchmarks trading relatively flat, with investors now turning their attention back towards US stockpiles following yesterday’s API report. The report showed that inventories at the key storage hub at Cushing rose by 2.4mn barrels last week. If this is confirmed by the official data today, it would be the fourth straight gain and the largest since February.
  • Looking at the day ahead, it is quieter with no data due for release locally and only really the Reserve Bank of Canada’s decision on rates later in the day from an international perspective. Geopolitics is however front and centre. US President Joe Biden has warned that not only will the US implement sanctions on Russia should it invade Ukraine, it will in conjunction with its European allies provide additional defensive capabilities to Ukraine  Reuters reported  – The president “made clear that the U.S. and our Allies would respond with strong economic and other measures in the event of military escalation,” the White House said in a statement.

Rand and International FX Commentary

  • Overnight, US stock markets have rallied to fresh record levels, overall levels of risk appetite have improved, and data from SA scientists have confirmed what many in the market already suspected. The Omicron variant is highly transmissible but far less dangerous. It may escape immunity and vaccines, but its symptoms are mild. This is extremely good news if one considers that the virus has mutated in a way that no longer holds as much potential to kill the host and could now become endemic to the global population in much the same way as flu has.
  • Furthermore, SA’s parliament voted against the land expropriation without compensation bill to help the ZAR appreciate further. For now, SA’s property rights still stand for something, which is a development that global investors will cheer. It is a combination of good news that should assist the ZAR stage a material recovery throughout the week. All that is required is for the countries that imposed travel bans on SA to reverse those decisions and for commodity prices to recover off the back of USD depreciation, and the ZAR can make a sustained recovery into year-end to finish 2021 on a high.
  • Commodity prices rallied strongly on news that the Omicron variant is unlikely to trigger any more restrictions and shutdowns. Vaccinations still offer some protection against illness, even though they are ineffective at preventing transmission. What started out as a variant of grave concern has rapidly turned into some of the year’s best news. Emerging market currencies, especially those exposed to commodity prices, now find themselves in the sweet spot to take advantage of any rotation away from the USD, whose safe-haven status is no longer sought after.
  • In SA’s case, the jump in commodity prices will need to be weighed up against the surge in the oil price to determine whether terms of trade have improved, but on aggregate, it is hard to see the market interpreting the overnight news bearishly. On the contrary, the USD-ZAR will now target levels closer to 15.73, which, if broken, could start a much larger recovery back towards the 15.0000 handle with the initial 38.2% retrace from the May lows targeting 15.2100

Nicholas Kabaso

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