One of Africa’s resilient economies amidst global chaos Zambia is experiencing a quandary in its bond market. Dubbed one of the best performing assets on the globe, Kwacha fixed income instruments are still constrained by a plethora of factors breeding uncertainty. These range from the current state of the world financial markets in the aftermath of the war in eastern Europe, pandemic effects in the east and other political developments to a sticky homogenous hurdle concerning clarity as to when its bilateral and private debt will be fully restructured. No one has blatantly admitted the world is in recession but most metrics do point to very highly likely odds. Zambia’s central bank was only able to absorb K871.76 million worth of purchasing power of the K1.26 billion appetite in Fridays primaries of the K2.6 billion of assets on offer.
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Arguably expectations post the Internal Monetary Fund board approval of a $1.3 billion extended credit facility, most players expected the curve to flatten which has not been the case. The term structure of interest rates is currently being driven by complexity posed by offshore behavior dictated by global monetary policy tightening and uncertainty as to when the graded debt will be fully restructured. It is about a dry point of construction that Africa’ second largest copper hotspot has undergone significant economic transformation that was given a positive cue from stronger political will and bold steps taken to restore fiscal fitness. This in principal accelerated securing on an IMF bailout deal with the Washington based lender but worth mentioning is that there are still structural issues requiring attention before credit rating agencies can upward adjust the current default rating posture on the foreign currency long term issuer side.
The Friday 29 November bond sale, recorded more interest in the shorter to medium end (2-5 years) of the curve compared to the longer end. This risk appetite skew could suggest a rather conservative approach by offshore investor in view of economic expectations. However in a weakening Kwacha environment, lower appetite for longer dated tenors (7-15 years) likely suggests very weak offshore investor turnout in the bond sale.
The Kwacha curve continues to offer attractive risk premiums of about 700 -1,800 basis points to local purchasing power given single digit inflation last headlined 9.7% for the month of October. Other drivers of curve suppression to lower interest rates would be the Dr. Situmbeko Musokotwanes fiscal plan to ebb domestic borrowing for 2023 by 27% to K16 billion in the quest to manage overcrowding of credit markets to force liquidity to the private sector at lower yields.
On the upside, the debt restructure quagmire will continue to weigh while the excessive inflation aftermath in the west exacerbating interest rate hikes is not making investors any calmer. This is a key driver of capital flight to safer haven homes such as dollar denominated assets and gold.
The Zambian government approved a pensions bill allowing for an amendment to the NAPSA Act No.40 1996 that provides for partial withdraw of pensioners benefits. This development could affect future investment of the largest state pension fund which ideally is a major player in the fixed income market.
Yields remained unchanged in the 20’s keeping the sovereign bond index firmer at 11% in local currency and 15.6% in foreign currency terms out performing the S&P 500 index which is down 22.2% year to date.
The Kwacha Arbitrageur