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Local Market Commentary
- Yesterday, the finance ministry reported that public external debt rose to $17.3bn at the end of 2021 from $17bn in June. The total includes $13bn central government debt, $3.4bn in state-owned enterprises debt, and payment arrears account for the rest. Meanwhile, total public debt stood at $31.7bn at the end of 2021.
- Speaking to lawmakers yesterday, Finance Minister Situmbeko Musokotwane said that Zambia is “progressing very well” in its plans to secure an economic program with the International Monetary Fund. Musokotwane said, “I can assure you without any doubt that the program is going to go through by the middle of this year without any problems.” Note that Zambia needs to agree with creditors to restructure as much as $17.3bn in external debt to get the IMF board approval for a program.
- Regional focus will be on the South African Reserve Bank who will deliver a decision on interest rates later this afternoon. The SARB’s MPC will have to tread carefully in this week’s policy decision. Initially, we expected SARB to pause its hiking cycle this month following January’s 25bps rate hike. However, concerns about inflationary pressures, driven by Russia’s invasion of Ukraine, have shifted the scales towards a probable rate hike, even though there is still a degree of uncertainty to the trajectory of headline inflation due to Rand’s strong performance and a pullback in oil prices.
- Market reports are that the Chinese commodities exchange in China is seeing lower levels of liquidity as investors are spooked about the spread of the COVID-19 virus through the country’s industrial heartland and Beijing’s harsh lockdown measures to stamp it out. The top steel making hub of Tangshan and the commercial hub of Shanghai have witnessed severe lockdowns which is making commerce difficult, from manufacturing to logistics, all have been affected.
- Equally concerning is the fact that wild price swings in commodities and the subsequent raising of margin calls at exchanges are resulting in many participants withdrawing from the market as it has become too expensive to participate. This has resulted in further volatility as liquidity is sapped from trading pits. Bloomberg reported – “It’s simply a general concern across the marketplace that we’re losing participation,” Vitol Group Chief Executive Officer Russell Hardy said. “Capital generally across the market is thinly spread and can’t do as much as it might have been able to do a year ago because the cost of doing businesses has increased.”
- At the moment, movements in the USD are a function of the rise and fall in risk appetite and the performance of global stock markets. When stocks are doing well, the USD falls back. When volatility rises once more, the USD tends to do better. This morning the USD is on the front foot, with the spike in oil prices and the wobble on stock markets spurring on a rotation into the USD. Also helping has been the more hawkish comments from Fed speakers that backed a possible 50bp incremental hike if needed. It has appreciated against the EUR, which slipped back to 1.0979, and the GBP, which slipped down to 1.3184 at writing. For now, the JPY remains firmly on the back foot and the funding currency of choice for any carry trades.
Rand and International FX Commentary
- The ZAR is on the front foot as we approach the SARB’s MPC decision. While it has been helpful that the ZAR has appreciated, helping mitigate some of the effects of the higher oil prices, it has not been enough, and the under-recovery in the fuel price still stands at close to R2/ltr. This would further constrain disposable income and would act like another tax, against which the government is looking to offer some tax relief to motorists through April and May. That will be welcome news and mitigate the effects on inflation, but it will not be enough to stop the SARB from hiking rates at this meeting and others that will follow later this year.
- Allowing second-round effects of inflation to take hold could prove counter-productive, and the SARB will act against that by further tightening policy. It implies that rates will rise steadily through the year, and by year-end, the repo rate should stand closer to 5.25%. This holds implications for the ZAR in that it will keep the ZAR competitive, especially if commodity prices remain elevated to keep the trade and current account surpluses alive.
- Hiking rates boosts carry attractiveness and reduces the incentive for any negative speculation on the ZAR. The latest CFTC data shows that speculators were net bullish on the ZAR by a record amount. Between the positive terms of trade and the foreign earnings through exports and the carry attractiveness of the ZAR, there is a tailwind that will continue to support the ZAR through the months ahead. The timing couldn’t have been better at a time when global inflationary pressures are rising.
- As indicated before, SA’s weaker money supply dynamics, its unique position of being a commodity producer, and the conservatism of the SARB have stood the country in good stead. It is one of the emerging market countries that has weathered the storm of the war in Ukraine better than most and will likely continue to do so. Furthermore, technical suggest that further ZAR gains are possible, with the only caveat being a potential bout of profit-taking that may follow today’s SARB announcement. That is not assured, but given the ZAR’s appreciation this week, some investors will be looking for a catalyst for a reversal.