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Southern Africa Weekly Report: 7-11 June

  • SA markets focused on the plethora of economic data out this week
  • Zambia's electoral body has suspended campaign rallies before the August 12 elections
  • Elevated copper prices and expectations of a deal with the IMF have provided some support for Zambian bonds

Southern Africa Week Ahead

The spotlight in the Southern Africa region will be on South Africa this week amid a plethora of data releases. South Africa's data card will hold cyclical information, with Q1 GDP, SACCI and BER business confidence indices, the current account and mining and manufacturing all up for release. Generally, weak growth has been the surprise in most cases, although various leading indicators seem to be pointing to a pick-up in activity. With the government dragging its feet on reform, however, growth is likely to remain subdued and below potential for some time still.

Economic activity in the first quarter of the year is estimated to have continued its recovery but remained below pre-pandemic growth levels due to Covid-related shocks and the reintroduction of coronavirus restrictions. However, for the recovery to continue at a significant pace going forward, we will need to see increased investment levels, the swift implementation of reforms and a declining unemployment rate. While the more permanent impacts of the lockdowns will linger, failure to address SA's structural challenges will see the weak growth dynamics persist this year.                                                                                   

Current account data will also hold significance for the ZAR and, by extension, the rates cycle. SA managed to record an annual surplus for the first time in almost two decades in 2020 as the economy's contraction suppressed import demand. Moreover, the trade account remains near a record high as exports continue to be supported by high commodity prices while imports continue to be subdued amid the weak economic recovery. With these dynamics set to remain in place, at least in the near term, SA's trade account and, by extension, the current account will remain supported and thus underpin the ZAR's resilience.

On the news front, Zambia's electoral body has suspended campaign rallies before the August general 12 elections amid a surge in coronavirus cases. The Electoral Commission of Zambia Chief Electoral Officer said that political parties should use alternative methods of campaigning that avoid crows and that the election will go ahead as planned unless a state of emergency is declared. The suspension of rallies will likely heighten tensions before voting with President Lungu's biggest opposition the United Party for National Development having last month accused President Lungu of using the pandemic to effectively block it from campaigning.

Meanwhile, additional support for businesses is on the cards as they battle to recover post the COVID-19 induced lockdowns in Botswana. The government has announced that through Botswana Export Credit Insurance they will extend the BWP 1bn loan guarantee scheme to the 31st March 2022. The scheme is designed to offer support and encourage bank lending to qualifying businesses by offering a partial guarantee of some 80% of the debt with the bank holding the balance of the risk.

In Mozambique, investor focus at the moment is on the ongoing insurgency in the northern part of the country, which continues to dent foreign sentiment. Moreover, the insurgency is also weighing on Mozambique's economic prospects, given that much of the country's economic hopes rest on the extraction of its LNG reserves. Recall that the $20bn Total led LNG project based in Cabo Delgado has been delayed as a result of the intensification of security risks in the province. That said, there have been some positive developments over the past few days, with the Southern African Development Community (SADC) announcing at the end of last week that it is prepared to assist in the fight against the insurgency, which has destabilised the region.

International Week Ahead

The ECB's June policy update and US CPI data for May, both scheduled for Thursday, will headline the data card this week. The ECB meeting is shaping up to be a big one, with the central bank expected to announce the parameters of its asset purchasing programme going forward. Consensus expectations are for it to continue at its current pace rather than dropping to Q1 levels, which will keep European bond yields suppressed and risk appetite supported.

Meanwhile, the US CPI print will provide fresh insights into building inflation pressures in the world's largest economy and could trigger speculative bets against the Fed's looser-for-longer policy mantra. Ultimately, however, the Fed is likely to pour cold water on these bets, meaning the USD may remain under selling pressure for a while longer. 

Market 

At the start of the week, the USD appears to be consolidating after its broad-based retreat on Friday. The DXY (trade-weighted USD index) has built a strong base just below the 90.00 level in recent weeks and may need a catalyst to break lower while uncertainty over prospective US inflation and monetary policy prevails.

Shifting to the Southern Africa currency complex, it has been a mixed bag for currencies against the USD at the start of the week. While the MZN and BWP have advanced thus far, the ZAR has been on the back foot while the ZMW is little changed. A broader bearish bias is expected to remain entrenched in the Kwacha in the week ahead as demand for hard currency outweighs supply.

For the ZAR, which in recent sessions has traded from strength to strength against a weaker dollar, some temporary consolidation and profit-taking may become attractive around current levels. How much further the ongoing ZAR bull run can continue remains to be seen, however, and is likely to be contingent on market positioning ahead of the upcoming US inflation data and ECB policy meeting in the near term.

Elevated copper prices and expectations of a deal with the IMF have provided some supported to fixed income assets (both local and dollar) in Zambia, even as the country shows no near-term prospects of resolving a default on its Eurobonds. Data from a June 3 Treasury bill auction shows that yields fell across maturities for the first time in a year. Longer-dated tenors have advanced too amid growing demand. Ten-year bond yields fell to 31% at a May 28 auction, the lowest in a year and down from the 34.5% investors had demand since February. Zambian Eurobonds have also rebounded, with the 2024 bond returning around 17% in the past quarter, becoming Africa’s best performer, despite a default in November last year and little progress on the debt restructuring front.              

While Zambian bond yields across the board have traded lower, it is worth noting that investors continue to demand a significant premium for holding Zambian debt, given the precarious fiscal position that the country finds itself in. Going forward, although we do see scope for a further decline in Zambian bond yields, we expect a significant fiscal premium to remain baked in.


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