Amidst the global market conditions tighten to curb asset routs and delays in debt restructure delay International Monetary Fund deal closure, the Kwacha demand has started to scale curve higher in Africa’s copper hotspot Zambia.
The Bank of Zambia shared on its website results of the Friday June 24, primary bond sale, the sixth of the year, revealed a 200 basis point climb in the 3 year tenor to 22.0% while the 5 and 10 year moved a bearish 100 bps rise respectively to 23.5% and 27.0%. The central bank only satisfied K1.6 billion of the K2.3 billion on offer of the K2.6 billion on offer somewhat reflecting limited offshore interest. Significant interest was observed in the medium end of the curve (2-5 year).
IMF DELAYS BREEDING MARKET WEARINESS
Growing fiscal uncertainty from delays in conclusion of a bailout assistance with the Washington based lender, the IMF and sharp declines in red metal prices sliding to 16-month lows are fueling rising interest rates. The copper trajectory is largely on cooling economic growth momentum in China. Other drivers of base metal trajectory are cooling housing markets across the world and sagging private sector pulse in the United States, United Kingdom and European Union showing slowing industrial demand.
Earlier, Zambia’s Finance Ministry had forecast June as the deal closure month which is highly unlikely given the ongoing restructure discussions and the need for consensus. China awaits the IMF to sign a deal with Zambia while the IMF on the other hand requires clarity around restructure before any commitments can be made. Standard Bank analysts project an IMF deal for Zambia early 2023. Other key risks to the fiscal discussions concern potential haircut changes given an evolving global landscape characterized by tightening financial conditions.
“Haircut discussions are not the easiest in unpredictable environments especially as one with global tightening. Time is of the essence and haircuts will have to be revised further because fundamentals keep shifting every day. Zambia will get an IMF deal but what is very vague is when and this is causing market weariness,” Nikiwa Capital Chief Analyst Munyumba Mutwale said.
UNDERWATER US CURVE GIVES EM ASSETS A LIFE LINE
The current state of the global environment occasioned by Russo – Ukrainian geopolitical spate breeding food and energy inflationary pressures adding onto the pandemic aftermath, the US treasury curve remains underwater. This has been said by analysts to support the current offshore holdings off emerging market securities, Kwacha securities inclusive, but not for long.
Soaring inflation has triggered aggressive rate hikes such as the last taken by the US Fed with a 75bps bring the federal funds rate to 1.50 -1.75% the highest in 40 years to tame notorious inflation. Homogenous patterns have been observed with the Bank of England (BOE) scaling its interest to 1.25%, the fifth consecutive hike. A further 50 or 75 bps is set to hike the funds rate to 2.00-2.25%.
For domestic markets, an easing consumer price index and rising yields on government securities is widening premiums for treasury risk and is making Kwacha assets much more attractive even in dollar terms compared to assets the west is offering.
Interest rate outlook is bearish in the immediate to medium term should global tightening persist and a bailout deal with the IMF delays further.
The Kwacha Arbitrageur