One positive externality of the recent Kwacha bond rally euphoria, is that the yield curve has significantly flattened over the last one month and credit markets are already pricing in lower cost of lending. The government securities (bond) curve has climbed down by an average of 825 basis points (bps) across the fixed income spectrum as both offshores and onshore players do tap into lucrative yields given subsiding political risks and widening confidence post the August 12 polls that saw Hakainde Hichilema ascend to Presidency.
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Most of the hype around the attractiveness of government paper is most being fueled by the state of the global economy, after aggressive stimulus packages that saw massive liquidity injections by central banks that sought to absorb pandemic induced credit risks. This intervention was inflationary as but global central banks were more interested in clawing back lost growth that was earlier eroded by the COVID19 pandemic. Interest rates were ultra thin making US treasuries unattractive because of ultra thin returns (lower than inflation). Excess global liquidity has found itself housed in emerging and frontier markets, Zambia inclusive. Africa’s second largest copper producer finds itself struck with luck as metal prices on the London Metal Exchange reverberate in the $9,500’s/MT for copper which is a bellwether for recovery despite frail fiscal position. The outcome of the August poll gave stronger pulse around tangible closure of an International Monetary Fund – IMF deal which Zambia has for a long time kicked down the road.
POSITIVE SIGN FOR WIDENED SCOPE FOR CREDIT GROWTH
The government securities curve remain the proxy and benchmark for the cost of credit in the Zambian markets. Term funding is forecast to ebb significantly up to 900 -1,100bps for 3 – 5 year on fresh money, a credit market repricing that will stimulate domestic credit to support the growth agenda for the nation. Credit costs have for a long time remained elevated as a reflection of deteriorated sovereign posture and overcrowding effects of government appetite for domestic funding, a strategy to curb excessive external debt growth by the MinFin.
The last Monetary Policy Committee – MPC communique for September 01, revealed that bond yields for 2Q21 sagged to 31.3% from 33.7% whose forecast is now in the 20%’s to force lending rates lower in 4Q21. Lending was reported at 16.3% higher year on year in June 2021.
SOVEREIGN RISK STILL COUNTERINTUITIVE TO CREDIT GROWTH
There exists further latitude and scope for credit growth, despite fragile sovereign posture, given softer yields. Sovereign risk still remains an elephant in the room as risk appetite is constrained. Most commercial banks will still reflect the Fitch/Standards & Poor’s/ Moody’s ratings in their credit gradings and as such will constrain credit extension to some extent. Only when Zambia locks in an IMF deal for an extended credit facility will debt be successfully restructured, then can rating agencies revise ratings for the copper producer higher.
Other drivers of credit growth will include the recent currency appreciation giving a boost to import oriented businesses and forecasted reforms in key sectors such as mining, agriculture, manufacturing and the SME facilities. What Zambia is experiencing right now is subsiding political risks as risk appetite claws back into the economy poising the copper producer for a rebound in economic performance.
The Kwacha Arbitrageur