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Local Market Commentary

  • Zambia’s Markit/Stanbic bank PMI was little-changed in June, coming at 49.9 from 49.8 in the month prior. This signalled  broadly stable business conditions over the course of the month. Survey results from Markit showed that while price pressures and money shortages acted to dampen demand at some companies, leading to output and new orders to decrease, others reported having been able to secure new customers. There were signs of inflationary pressures easing while firms continued to expand their employment levels and purchasing activity. Meanwhile, hopes that economic conditions will remain stable helped to support new order growth and contributed to optimism about the year ahead outlook for business activity. That said, sentiment dipped slightly from May. While business conditions remained broadly stable in June, the recent fuel price hikes could impact business conditions going forward.
  • The Ministry of Finance and National Planning yesterday reported that Zambia’s total public debt (public debt and publicly guaranteed debt) stood at $25.98bn at the end of March. Meanwhile, central government external debt was $13.2bn, and guaranteed and non-guaranteed state-owned enterprise loans amounted to $1.5bn and $117.18mn, respectively. The domestic debt burden amounted to $11.15bn. The increase in the debt stock was attributed to disbursements from multilateral creditors. Finally, external debt-service arrears were $2.53bn by the end of March. Meanwhile, Zambia has tabled new sovereign debt law following the recent default on loans. The proposed legislation submitted to lawmakers provides for the raising of loans and the approval thereof by the national assembly. Moreover, the law also calls for the establishment of sinking funds and a debt management office.
  • Meanwhile, Commissioner-General Dingani Banda yesterday reported that the Zambia Revenue Authority surpassed its collection target by 4.6%. Specifically, the revenue authority collected ZMW48.3bn in next taxes from January through June, compared with a target of ZMW46.2bn. Meanwhile, ZMW 56.4bn was collected in gross taxes, and refunds stood at ZMW8.1bn. According to Banda, the surplus was mainly due to a strong performance of direct taxes from higher copper prices.
  • In an extensive interview with Bloomberg, Akinwumi Adesina, President of the African Development Bank, said that African countries require $424bn this year to help them cope with the devastation caused by the coronavirus pandemic. Adesina was quoted as saying, “We should not minimize the impact of the coronavirus pandemic on African economies. We have to expand the fiscal space for African countries. Secondly, we must tackle the whole issue of debt. You cannot run up a hill while carrying a backpack of sand on your back.” On the International Monetary Fund’s reserves, Adesina acknowledged that while special drawing rights have helped, “Africa still needs to have $150bn channelled to it.” Regarding the continent’s debt burden Adesina said, “A lot of the debt in Africa is infrastructure-related debt, but if we are able to get a sustainable way to do this, that would be much better. That sustainable way is that the private sector has to have a role, it shouldn’t just fall on the government.”
  • Moving over to the US, the June jobs reports report headlines the data card. The addition of employed workers in the US is likely to have continued to slow in June, as demand may be cooling amid high inflation and surging wages, while supply remains tight with the unemployment rate at just 3.6%. Consensus expectations are for the labour market to have added the fewest number of jobs since April 2021, although this should keep the jobless rate at May’s level and at post-pandemic lows. The data, however, may not be too market moving unless we see a massive miss, given that the Fed is intent on hiking rates to calm inflation, shifting its focus away a bit from the labour market for now.
  • In the FX markets, the Zambian Kwacha will likely continue to hold steady next week as corporates gather local currency liquidity to pay taxes. Meanwhile, ahead of the non-farm payroll data this afternoon, the USD has consolidated its position and remained strong. It continues to be supported by policy divergence between the Fed and the ECB, BoE and BoJ. Equally, Fed speak of more tightening to come only served to reinforce the point and raise the significance of the data this afternoon. Yesterday’s weekly jobless claims in the US showed some signs of a softening in the labour market. Any further indications that this is the case in the payrolls data and the USD may enjoy some correction weaker after a very strong week. For now, the EUR-USD continues to trade below 1.0150, while the GBP continues to trade around 1.2000. The JPY enjoyed some safe-haven support after former PM Abe was shot, but not enough to reverse the trend of JPY weakness against the USD.

Rand and International FX Commentary

  • Into the week’s final trading session and the volatility might extend a little further as investors turn their attention to the upcoming US payroll data. A tight labour market in the US has been part of the mix of developments that have driven inflation higher as it bolstered wage settlements. The Fed has responded and, judging by the Fed speakers yesterday, is bound to do more. At least another 75bp at the next meeting, followed by smaller incremental rate hikes after that.
  • Policy divergence remains a prominent feature of the currency markets, with the USD benefiting from the inability of the ECB and the BoJ to do much. The rotation to USDs is affecting the crosses and keeping a USD bid alive. Speculative activity, as reflected in the latest CFTC data, also continues to support the USD, and it would require a significant softening in US data and a reversal of expectations to change this dynamic. That might unfold over the medium term, but a lot would need to change. Today’s US non-farm payrolls are unlikely to be enough.
  • Other international factors to consider, include China’s shift towards more stimulus as it allows local governments to borrow $220bn to shore up their economies. There are also signs of softening their stance against Covid, implying fewer disruptions. Although good news for SA that one of its main trading partners is stimulating, it will only affect trading dynamics on the ZAR at the margin.
  • Finally, it is worth noting that the authorities have stepped in to stop truck protests as the authorities do everything in their power to avoid another repeat of the riots that broke out around this time last year. There are also indications that a special investigative unit is actively looking to prevent sabotage at Eskom and Transnet. Steps have been taken to increase the security to assist these SOEs in remaining functional. Although bad news that this is even necessary, it is a relief that action has been taken. Whether that is enough to encourage the ZAR to make a recovery is unclear, especially ahead of the payroll data this afternoon. For now, consolidation at these weaker levels seems plausible.

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