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Improving global economic outlook underpinning appetite for EM assets

  • Forex: Speculators keep building long South African rand positions with room to go further
  • Fixed Income: Improved global economic outlook bolstering demand for developing market assets
  • Macroeconomic: Zambia still faces some significant hurdles in its push to conclude a deal with the IMF

GLOBAL   

China is front and centre for base metal desks at the moment. The Chinese state planner, the National Development and Reform Commission stated that it will strengthen its controls of key commodities from 2021 to 2025 as part of its 14th 5-year plan. The commission is currently drafting plans to cope with what it views as abnormal price fluctuations in commodities such as copper, corn and iron ore. China has been aggressive in re-stocking across the commodity spectrum using COFCO, its state-owned commodity trader to source commodities across the world. One point to note is that China’s trading activity is very opaque and they are not traditionally forthcoming with the size of their commodity holdings. This is likely to remain a factor as they re-stock as they will not want to unduly affect any price more than needed.

Gold is marginally lower this morning holding around the $1880.00/oz level as we enter the start of the EU session. The yellow metal remains focused on the broader global inflation outlook as well as the trajectory for the USD at the moment. Interestingly, there has been word over the weekend that some institutional investors are abandoning their crypto currency endeavours and rotating back into gold as a hedge against currency debasement. The environmental impact of crypto mining does not give it favourable ESG credentials which is something that many funds are coming to grips with at the moment. ESG is a growing factor which funds have to manage within their portfolios.

AFRICA

Nigeria: The Central Bank of Nigeria (CBN) will be in the spotlight today. Recall that the CBN kept its policy rate unchanged at a record low of 11.50%. The decision to leave rates on hold came despite headline inflation being more than double the upper band of the CBN’s 6% to 9% inflation target. It is widely expected that the CBN will leave rates on hold today as policymakers focus on supporting the flagging economy. Note that with inflation risks tilted firmly to the upside, a rate hike can't be ruled out. If the CBN decides to leave its benchmark interest rate on hold, Nigeria’s real interest rate will remain deep in negative territory.

Kenya: Kenya’s trade deficit widened in March. Specifically, Kenya’s trade deficit widened from KES 92.23bn in February to KES 118.85bn in March, its highest since September 2014. The widening in the trade deficit was driven by a faster pace of growth in imports than in exports. Kenya’s imports increased from KES 159.72bn in February to KES 187.10bn, while exports increased from KES 67.49bn to KES 68.25bn in March. As a result, in Q1 of 2021, Kenya’s trade deficit stood at KES 317.5bn compared to the KES 247.7bn during the same period in 2020. The widening of the trade deficit will weigh on the country’s current account.

Democratic Republic of Congo: The DRC is likely to unlock as much as $3bn from the World Bank as the country emerges from a power struggle. The end of the power struggle between President Felix Tshisekedi and former President Joseph Kabila comes as supporters of Tshisekedi took control of the government from Kabila’s allies. The World Bank country director Jean-Christophe Carret stated that the lender had withheld approval for the funds as it waited for the government to implement agreed-upon changes to its handling of public finances, deregulation, governance and reform of state-owned enterprises. The disbursements of the funds over the next 18 months is likely to be welcomed by the markets as it would boost the new government’s effort to deal with multiple economic and social crises and ongoing conflict in eastern Congo.

Uganda: A poll conducted by Bloomberg revealed that Uganda’s economy is expected to expand by 5% in 2021, an upward revision from the previous projection of 4.2%. The economic recovery is expected to continue in 2022, with the economy forecasted to expand by 6.0% next year. The recovery in growth is being supported by the monetary and fiscal stimulus deployed to cushion the economic blow of the pandemic. The easing of lockdown restrictions is also underpinning the recovery. Inflation meanwhile is projected to remain benign this year. Economists downwardly revised Uganda’s 2021 inflation forecast from 4.6% to 4.1%. The downward revision to inflation will bolster the central bank’s ability to maintain an accommodative policy stance to support the economic recovery.

Nigeria: The Central Bank of Nigeria (CBN) officially announced that it had devalued the NGN by 7.6% against the USD as they migrate towards a single exchange-rate system. On its website, the CBN noted that they replaced the fixed rate of N379/dollar used for official transactions with the nafex or the I&E exchange rate of N410.25/dollar. This move of unifying the two rates is expected to improve the country’s currency-management system, investor transparency and also helps meet the conditions of the $1.5bn loan from the World Bank and IMF.

Egypt: The investment drive into Egypt remains robust, with the reforms as part of the IMF bailout yielding dividends across the economic spectrum. Prime Minister Mostafa Madbouli met with the Chairman of the German firm DMG Mori. The result is a potential deal in which the DMG Mori will establish a Computer Numerical Controls factory in Egypt with a capacity of some 1000 machines. The deal will press ahead following the inking of the agreement by German officials and the Egyptian President Abdel Fattah el Sisi, resulting in a factory that will be the first of its kind on the African continent. Egypt is well placed logistically, given its proximity to the EU and along trade routes, and we expect more investment of this nature in due course.

Forex: Speculators keep building long South African rand positions with room to go further

Against the backdrop of elevated international commodity prices, which is bolstering South Africa’s terms of trade, traders are turning more bullish on the South African rand (ZAR). Speculators in the non-commercial futures market marginally upped their net long ZAR bets during the week ending May 18, taking the overall monetary position up to $0.21bn from the $0.20bn the week prior. This was a result of a combination of gross longs being added while net shorts were trimmed.

ZAR appreciation through the week also contributed to a stronger net long position in terms of monetary value. As a percentage of total open interest, the ZAR net position is around 39%, its highest since the start of March but below recent peaks of over 65%, suggesting that there is some room for ZAR net longs to build further in the coming weeks.

Speculators continue to turn more bullish on the ZAR and have room to build this position further, which should support the currency within the spot market in the near term. However, it must be noted that ETM’s proprietary models suggest that the bullish bias in the ZAR is unlikely to be sustained over the medium to longer term. Therefore, we advise investors to take advantage of this period of ZAR strength and build up their offshore positioning.  

Fixed Income: Improved global economic outlook bolstering demand for developing market assets

An improvement in the global economic outlook, driven by the significant progress being made on the vaccine front and the commitment from major central banks to “looser for longer” monetary policy, has boosted risk appetite. The improvement in global risk sentiment saw demand for higher-Beta developing market assets jump last week.

Weekly data published by Bloomberg showed that investors poured $1.03bn into emerging market exchange-traded funds in the week ending on July 21, more than double the amount recorded in the previous week. Last week marked the strongest inflows into US-listed emerging market ETFs since early April. It is also worth noting that last week marked the 29th consecutive week of inflows into emerging market ETFs.

It is interesting to note that the inflows were led by iShares ESG Aware MSCI EM ETF, which invests in stocks that have positive environmental, social and governance characteristics. The Bloomberg data showed that the iShares ESG Aware MSCI EM ETF recorded a net inflow of $138mn last week, the largest in over four months. This is clear evidence of the shift amongst global investors towards sustainable investing.

In terms of asset classes, equity ETFs accounted for most of the inflows last week, with stock-based ETFs expanding by $849.3mn. ETFs that invest in bonds also recorded inflows, with bond-based ETFs rising by $182mn, rebounding from a net outflow in the previous week driven by rising inflation expectations. On balance, while investors are still erring on the side of caution amid the lingering risks pertaining to the COVID-19 pandemic, there has been a clear improvement in global risk appetite, which should continue to bode well for African assets in the foreseeable future as investors go in search of yield.

Macroeconomic: Zambia still faces some significant hurdles in its push to conclude a deal with the IMF

While it is encouraging that Zambia has made some notable progress towards securing a deal with the International Monetary Fund (IMF), the Washington based lender said that challenges brought about by Zambia’s debt and how to dismantle domestic arrears. This is making it difficult for the country to conclude a deal with the Fund. Commenting on the matter, IMF Spokesman Gerry Rice said that key challenges in moving the talks forward include how to implement reforms to deal with the country’s massive fiscal problems.

Rice did however note that the IMF is of the view that the Zambian government knows what needs to be done in order to secure a program, which the country so desperately needs. Some of the key challenges that need to be addressed by the Zambian government include the implementation of reforms that deal with the country’s large fiscal deficit by increasing revenues and scaling back on expenditure. The IMF spokesman added that there also needs to be transparency in terms of the country’s debt and expenditures.

The Zambian government has requested a financing arrangement with the IMF to support its reform agenda, which it deems necessary to boost economic growth and put the country back on a sustainable debt trajectory. Rice noted in his statement that a broad agreement has been reached which details the policy measures required to address the fiscal imbalances currently facing Zambia and to enable a return to sustained growth. Rice said that the Zambian government has reaffirmed its commitment to reforms, adding that the IMF looks forward to continuing those discussions towards an Extended Credit Facility program as key measures are taken.

While it is encouraging to see the progress made towards securing a financing program with the IMF, Zambia still faces some significant hurdles before it can conclude a deal with the international lender. Moreover, based on recent history, we are sceptical of the government’s will to roll out the much-needed reforms, given that they may be unpopular ahead of the general election in August this year.


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