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Zambian Kwacha outperforms peers on a quarter-to-date basis

May 20, 2022by Nicholas Kabaso
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Local Market Commentary

  • The African Union (AU) has proposed a fund to cover a $110bn infrastructure gap. The AU called for the establishment of an infrastructure fund to help finance the construction of roads, dams, and other infrastructure on the continent. According to Raila Odinga, the AU’s infrastructure representative, the continent has an annual funding deficit of around $110bn. Odinga further said that “Africa has idle capital such as sovereign wealth funds, pension funds, and insurance funds…. We can work with several institutions to establish this fund.” Note, that a rapid migration to urban areas has resulted in a significant percentage of the continent’s population living in towns and cities, placing pressure on the existing water and sanitation facilities, roads, bridges, and railways.
  • The Zambian Kwacha (ZMW) has staged a notable rebound in Q2 so far, with the currency ranked as the best performing on the African continent against the USD. For context, the ZMW has racked up gains of almost 6% on a quarter-to-date basis. That is double that of the second-best performing currency the Mauritian Rupee (+2.85%) and has seen the ZMW almost pare all of Q1’s losses of 7.84%. Note that in Q1 the ZMW was the third worst-performer only bettering losses of the Egyptian Pound and Ghanaian Cedi as a dollar liquidity shortage weighed.
  • The turnaround in the ZMW can be attributed to several factors such as central bank intervention in the market. The central bank in recent weeks has injected some liquidity to cover strategic pipelines. For context, Governor Kalyalya on Wednesday said that the bank sold around $370mn on the market to address volatility with the funds mainly coming from foreign exchange purchases from the mining sector. More recently, positive sentiment amid rising investor confidence in the economy has supported the Kwacha. Ongoing credit talks, improved metal prices, and a promising mining sector outlook have provided a boost to sentiment. Zambia is becoming a more attractive investment proposition for mining companies since the election of President Hichilema and a subsequent mining tax reform while the finance minister has expressed confidence that debt talks should be concluded by June.
  • Looking to next week, the ZMW is expected to trade steady against the USD as demand for hard currency remains relatively met by current forex supply on the market. Beyond this we expect the Kwacha to remain resilient on the back optimism that a deal with the IMF will be secured over the medium term and elevated copper prices, which are underpinning foreign currency inflows into the country.
  • Base metals experienced a rebound over night with the likes of nickel closing 7.5% higher on the session.  The easing of COVID-19 restrictions has helped  from a sentiment point of view however we would like to point out that we are far from business as usual in China and the expectation is that it will take may months to regain the economic dynamism.
  • On the news front, Reuters reported the following – Peru’s prime minister on Thursday failed to broker a deal with indigenous communities to allow for the restart of operations at MMG Ltd’s Las Bambas copper mine, the government’s fourth failed negotiation attempt. Chinese-owned Las Bambas is one of the world’s largest copper mines, accounting for 2% of global supplies. The mine suspended operations on April 20 after two indigenous communities entered company property, reclaiming land that had once belonged to them before the mine started operations in 2016.

Rand and International FX Commentary

  • In its final decision, the SARB decided to hike 50bp. It is a bold move, given the state of the economy. It aims to accelerate the SARB’s objective of unwinding negative interest rates, regardless of whether supply-side issues caused those negative interest rates or not. The SARB believes that the state of the economy is not a function of interest rates and that it can better support the long-term objectives of boosting growth by promoting price stability. There is much truth to that, and it is difficult to turn overly critical of the SARB, although what makes this particularly hiking phase different, is that it takes place amid a dearth of employment, consumption and investment.
  • Positive real interest rates will require the repo rate to adjust substantially higher. The SARB will need to raise rates by 50bp increments at the upcoming meetings, knowing full well that controlling inflation will be more a function of external factors than SARB policy. It might hike rates more aggressively, and impose a headwind that will slow down growth that barely exists, given high fuel prices, administered costs, load shedding and structural deficiencies. For context, SA GDP has not yet recovered to pre-covid levels like the economies of the US, UK, and others hiking more aggressively to slow demand.
  • Time will tell whether the central banks have judged the environment correctly and whether raising interest rates so aggressively is the correct approach. While rates need to rise, hiking them aggressively against such a weak growth backdrop when demand conditions are not strong enough to promote second-round inflation effects risks overreach and punishing an economy for price pressures it cannot control. At best, it may promote a more stable ZAR at the margin, which is constructive but will come at a cost.
  • The ZAR strengthened after the decision, which the SARB might feel vindicates its bold move. However, ZAR appreciation also coincided with a USD that retreated, so interestingly, not much of yesterday’s move was a function of the rate hike. The SARB met market expectations and dissuaded some negative speculation at the margin. At the very least, the SARB has now removed one scenario that might’ve counted against the ZAR, which could now find support to recover further as we head into the weekend. In a world of correcting equity markets, rising volatility and risk aversion, perhaps the SARB’s move has bought SA some insurance. Exporters may now look to take advantage of these levels while they still have them.

Nicholas Kabaso

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