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Zambia targets May for IMF deal

February 2, 2022by Nicholas Kabaso
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Local Market Commentary

  • In an interview with Reuters, Finance Minister Situmbeko Musokotwane said that the country expects an International Monetary Fund (IMF) debt health check to be finalised this month to strike a restructuring deal with creditors by April and get a formal agreement with the fund signed off in May. Musokotwane was quoted as saying, “I have to be optimistic because in the absence of optimism, where can Zambia go? We are a serious group determined to make sure that this issue of debt that’s been dogging us for years and years, we are determined to put this behind us.” The timelines set out by the minister appear somewhat ambitious, considering the group of Paris Club creditors and China have yet to form a creditor committee. However, it is worth noting that the minister said that Zambia had reached out to Chinese authorities asking them to be part of the process. According to Musokotwane, “in principle they have agreed, on the specifics, those are details to be worked out. In the end, I feel very confident that the Chinese authorities and the Chinese institutions that lent us money will play along to get us out of the problems.”
  • In the base metals complex,  the world’s bellwether for economic growth namely copper had a strong run yesterday. The 3m LME contract finished some 1.98% higher on the day. This morning we have the red metal building on those gains notching up another 0.5% in the Asian session albeit with thinner trading conditions given the absence of the Chinese for the Lunar New Year holidays.
  • On the news front, Reuters reported the following overnight, Chile’s constituent assembly approved on Tuesday an early stage proposal that could lead to the nationalization of the country’s copper industry, sparking an angry response from mining firms in the world’s top producer of the red metal. The environmental commission of the assembly, which is drafting Chile’s new constitution, green lit the proposal “for the Nationalization and New Social and Environmental Management of Copper Mining, Lithium and other Strategic Assets”.
  • It was another impressive performance by Wall St yesterday. With Alphabet beating expectations to further bolster risk appetite and Asian stocks firmly in the green this morning, the chances are that more gains will materialise today. In the main, earnings have beaten expectations to the topside and have offered relief to those anticipating a deeper correction. The VIX has tumbled and is gradually trending back to levels more synonymous with solid risk appetite. Today, one eye will turn to the latest ADP data for a fresh perspective on the U.S. labour market.
  • The last US ADP employment change print showed private-sector employment rose by much more than expected, with 807k jobs added in December (compared to 410k anticipated from consensus estimates as per Bloomberg surveys). This added to evidence that the U.S. labour market is growing extremely tight, with the economy still on a tear. It is thus no surprise that the Fed recently made it very clear that its policy focus was shifting from labour market recovery to price stability. However, the labour market will still need to hold up in the face of the Fed’s monetary normalisation process, and failure in this regard could force the central bank to slow down with rate hikes and balance-sheet run-off through 2022. Accordingly, labour market data will remain significant and hold plenty of market-moving potential.
  • It has been two consecutive days worth of losses for the USD, and this could well extend into a third as risk appetite continues to improve alongside a surge on Wall St and Asian bourses. Any labour market data that misses expectations and softens the hawkish outlook for rates could ironically support Wall St futures if the market reassesses what it has priced in for rate hikes. It could also impact negatively on the USD, which means all eyes will be on the ADP release later today for fresh direction.


Rand and International FX Commentary

  • It has been a very strong start to the trading week for the ZAR. It has capitalised on a combination of improved risk sentiment as global stock markets recover, some correction in the USD, and a surge in commodity prices. Although the recent trade surplus did moderate, it remains supportive of the ZAR. Money supply growth has also been soft to bolster resilience further and contain prices, while the ZAR’s undervalued position meant that it had ample room to stage a recovery.
  • Against all this positive news, investors will now have to consider the implications of a fresh set of political revelations unearthed in the latest Zondo report, and the unfortunate news that Eskom may be forced back into load shedding with more than 14,000 MW currently off line due to unplanned outages. Historically, any resumption of load shedding has not been good news for the ZAR and for good reason. It can impact heavily on heavy industry and mining, two sectors that are the main drivers of SA’s exports.
  • Looking at the day ahead, the focus will remain on Eskom as investors try and gauge the probability of load shedding and will also focus on offshore labour market data in the form of the latest ADP figures. The ADP figures will be the first of three labour market data releases that will offer an updated perspective on the state of the US labour market. Anything softer than expected will likely trigger a resumption of USD weakness and hold appreciative implications for the ZAR. 
  • However, with both the ECB and the BoE decisions looming in tomorrow’s session, some caution will moderate the extent of any ZAR appreciation given the recent gains. Nonetheless, it is worth noting that Asian stocks are firmly in the green this morning, and the VIX is now crashing to confirm that risk aversion has abated. On balance, the risk is that the ZAR continues to perform relatively well.

Nicholas Kabaso

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