On the cusp of an IMF deal, Zambia’s markets linger eagerly in wait

It’s Friday August 12, 2022 and the mood in Africa’s second largest copper producer Zambia is skewing towards fully optimistic from earlier optimism with caution. The Southern African nation reflects significant strides in its macros such as successfully taming inflation to single digit levels, though a few points above the Bank of Zambia target, positive growth but at rates lower than pandemic times and resilient private sector pulse as confidence continues to seep into the debt burdened economy. The Jesuit Centre for Theological Reflection shared its July monthly food basket numbers showing an increase in the cost of living yet the debate around ebbing inflation is very topical in households.

Global fundamentals remain feeble with uncertainty posed by a lengthened spat in eastern Europe between Russia and Ukraine that has dislocated grain markets sending soft commodity prices to highs. Crude markets are easing but still fairly high for net importers of the commodity and this is reflecting in softer manufacturing gauges. Positive news is what has kept currency markets afloat with a rally in the last few weeks supported in part by mining tax conversions in July period. The bellwether for global growth climate, copper, is everyday in its trading trajectory confirming the world could be sliding into a recession. On the other hand western nations are nursing excessive inflation through bigger rate hikes and this is breeding weak or sifter demand, a new problem the world faces as supply chains heal from pandemic disruption.

March, May and June are key dates the MinFin had earlier signaled ‘by then dates’ Zambia would have sealed a bailout deal with the Washington based lender, the International Monetary Fund. However markets started to grow weary of the wait with government security yields scaling higher in the 2,3 and 10 year bond tenors settling higher in the 20’s. Zambia’s MinFin Dr. Situmbeko Musokotwane in an economic symposium brief on 05 August 2022 advised the media that the copper producer would conclude a financing deal by end of August following assurances with the bilateral creditors while engagement with private creditors continues. In this vein markets remain sanguinely expectant of any announcements around the period. With bilateral creditor assurances under the common framework, the odds of Zambia’s case making it to the September 2022 session are widening. The sentiments echoed by IMF Managing Director Kristalina Georgeiva and World Bank President David Malpas on Zambia propelled market expectations signaling deal closure in sight.

Hichilema’s govt 1year anniversary gift to Zambia?
It’s almost one year since Hichilema was elected into power and on his clock some significant steps have been taken by the new dawn towards restoration of fiscal fitness. Hichilema first engaged the private creditor class – Eurobond holders – in London in the fourth quarter of 2021 after meeting with multilateral chiefs Georgeiva and Malpas in Washington which has by analyst been deemed as exceptional and the first time a sitting head of state executed such a mandate.

Risk appetite has already started to price into the market with key sectors such as mining, agribusiness, manufacturing and technology already seeing increased interest pre-bailout package attainment. Subsiding political risk can not be ruled out of the sentiment boost that the red metal producer has seen in the last one year despite a default rating on its foreign currency debt by Fitch, S&P and Moodys rating agencies. Zambia has seen greater political will and impetus in driving the restoration of fiscal fitness agenda with the current head of state owning up to his acclaimed title of chief marketing and investments officer, marketing Zambia to the world as a top investment destination. Should Dr. Musokotwane seal a deal by end of August, the new dawn regime will have themselves a one year anniversary gift to be applauded for.

Not really Russian roulette for Zambia
On the downside Zambia has a $750 million bond falling due in September for which the suspension of debt service would mean of no restructure consensus is reached with dollar bond holders, no payment is likely to be made. This would extend the copper producers default rating for longer with the rating agencies. Dollar bond (debt) is the only rated obligation in the overall stock and key determined of improved credit posture for the sovereign. Key threats to attaining consensus with private creditors is the interest rate environment governing determination of the right haircut for the bond holders given a global central bank monetary policy tightening cycle.

In the local markets this month
Key money market activities in the month include the pen-ultimate rate decision meeting of the year as the monetary policy committee deliberates monetary policy, a fortnight treasury bill and monthly bond sale which ideally should attract interest in view of the positive developments around Zambia.

The Kwacha Arbitrageur