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Local Market Commentary
- Lawmakers in Zambia yesterday approved a ZMW 19.3bn supplementary budget. According to Finance Minister Situmbeko Musokotwane, the supplementary budget includes about ZMW 10.2bn which was allocated in the 2021 spending plans but was not used. An additional breakdown of the funds shows that ZMW 6.6bn was dividends from the Bank of Zambia and other state entities, ZMW 2.1bn came from donor contributions, and ZMW 458mn was not spent from the previous budget of 2020. The supplementary budget is set to allocate resources to items, including settling arrears and coronavirus vaccine purchases.
- Ahead of an International Monetary Fund deal, Zambia has raised fuel pump prices as it scrapped subsidies. According to the Energy Regulation Board, Gasoline and diesel rose respectively by 20% to 21.16 kwacha ($1.29) per liter and by 29% to 20.15 kwacha per liter effective Friday. The hikes took into account international prices and the exchange rate while maintaining fiscal incentives, Pump prices will now be reviewed every 30 days after subsidies, and tax breaks kept them artificially stable for two years. The move by Zambia’s Energy Regulation Board comes as the country seeks $1.4bn in funding from the IMF. While the Washington-based lender has not flagged Zambia’s energy subsidies as a deal-breaker, it has opposed them in the past. Opposition lawmakers have played up the hardship higher prices may bring with inflation already at 19.3%. BoZ Governor Denny Kalyalya has said it’s necessary to raise fuel and electricity prices, even if it adds to near-term inflationary pressures.
- In the base metals complex, 3m LME copper is currently off by around 0.5% on the day following sharp gains yesterday which saw the red metal add 3.29% on the day. Investors have their eyes glued on developments in Peru where Las Bambas mine shuts down on Saturday given the roadblocks to the mine from locals. It is worth noting that Las Bambas is responsible for around 2% of the world’s copper production
- The initial upbeat assessment of the FOMC decision to accelerate the taper and signal three rate hikes next year appears to be fading already. Although the Fed argued that the economy was strong enough to tolerate the removal of stimulus and the rate hikes, investors appear to be dropping growth stocks if the behaviour across stock markets is anything to go by. This all happens against a backdrop of a surge in the Covid-19 Omicron variant, which has injected more uncertainty into the global economy. The result has been a modest rise in the VIX to signal an erosion of risk appetite and the USD that appears to be finding a base around prior low levels of around 95.60 on the trade-weighted USD index.
- Just like the rest of the world, the U.S. is experiencing a sharp rise in infections. Many major U.S. companies are allowing employees to once again work from home as they seek to slow the spread of the Omicron variant that appears to be spreading so much faster than previous variants. However, most economies are more accustomed to decentralised work environments to mitigate the impact on the growth of restrictions. This will still detract from GDP growth at the margin, especially within the consumer spending and hospitality sectors.
- In the FX markets, the depreciation bias seen on the Kwacha this week is expected to remain next week amid higher importer appetite for hard currency. Meanwhile, heading into the final trading session of the week and the USD appears to be on the defensive, although it is approaching some tough support towards 95.60 on the trade-weighted USD index. Lower levels of risk aversion following the FOMC were compounded by the surge in the GBP vs the USD yesterday following the BoE’s surprise decision to hike rates 25bp in the face of the surging Omicron variant. Expectations that the USD would be supported by widening monetary policy differentials were dealt a blow, and the “obvious” trade to bet on the USD appreciating is now being questioned.
Rand and International FX Commentary
- Notwithstanding the risk events of the past week, the ZAR looks set to end the week on the front foot. On Monday, that was considered unlikely given how the Fed would signal a stronger push for normalisation and that the BoE could hike. In the end, that is precisely what happened. Still, instead of emerging market currencies responding negatively to the news that developed market economies would remove the excess liquidity that has supported them, they chose instead to focus on the rally in stock markets which helped boost risk appetite. Whether that will be sustained or not remains to be seen.
- Heading into the end of year festive season where liquidity is severely constrained as SA closes down for summer holidays, there are still many risks that abound that are difficult to ignore. The court judgement declaring Zuma’s medical parole as unlawful and that he should return to jail may be a win for the country overall concerning the rule of law, but threats of violence have resurfaced. Memories of the violence that erupted earlier this year stoke fears of a repeat, and the country’s security cluster are now on high alert.
- Secondly, although SA’s tourism sector has been spared a shift to higher levels of Covid restrictions over December, the very rapid spread of the Omicron variant still has people concerned that we have not yet witnessed the full effects. Foreign countries that test a lot more than SA are reporting enormous waves of new infections and bracing for a sharp rise in hospitalisations. Although SA data has thus far shown the variant to be milder, it remains too soon to be conclusive, and one cannot rule out the possibility of more Covid-induced volatility in the coming weeks.
- Finally, Eskom has indicated that for maintenance purposes, it will shut Koeberg’s Unit 2 for maintenance for up to 10 months of 2022. The pained maintenance will remove 928MW of electricity generating capacity, raising the risk of load-shedding. After that, Unit 1 will then be shut for similar reasons and a similar amount removed from the grid. Load shedding has historically been bad for the ZAR. It severely constrains growth, especially in the productive sectors that generate the bulk of SA’s exports, including the mines, smelters, and vehicle manufacturing plants.
- So while SA can breathe a sigh of relief that Fitch upgraded SA’s outlook to stable from negative, and the USD did not surge stronger on the back of the Fed’s FOMC decision and statement, turning complacent holds its own risks. SA still faces significant challenges. The degree of undervaluation the ZAR exhibits exists for a reason. The ZAR needs to trade at a discount and offer some yield to investors, or it might be left even more vulnerable. This is happening against a backdrop of developed economy central banks withdrawing liquidity, implying that 2022 could be a tougher year for the ZAR.