The year 2019 was a very tough year for Africa’s red metal producer Zambia characterized by economic turbulence. Zambia grapples with rising debt exacerbated by infrastructure spending and an energy crisis that has heightened inflation risks while simultaneously suppressing growth to under 2%. With very few credit lines available to draw from to fund projects, the Zambian government has looked to the domestic money markets to raise cash to meet its fiscal programs.
The central bank had a total of 26 treasury bill sales with K950 million worth of assets on offer (per auction) of which only 8 were fully subscribed. Subscription haircuts were the order of the year reflecting weak appetite from players given the sovereign risk posture of the counterparty. Zambia’s credit assessment was lowered to CCC/CCC+/Caa2 by Fitch/S&P/Moody’s which pushed the yield higher as most players that searched for yield priced in perceived risks associated with fiscal posture.
T-bills outperformed dismal bonds. Treasury bills had a YTD subscription of 86% compared to 74% in 2018 while bond auctions were dismal in 2019 recording zero full subscriptions of all 7 fixed income sales and a YTD subscription of 36% comparing with 85% in 2018. In all the Bank of Zambia raised 68% of the cash target versus the assets on offer. The worst performance of 2019 was seen last Friday of the year selling on K105 million of the one yard on offer.
What does this behavioral tendency reflect? Players affinity and preference for shorter dated higher yielding assets than longer dated higher yielding assets is a reflection of the risk aversion given the elevated sovereign risks precipitating uncertainty in the longer term. Shorter duration flushes out risks as assets mature compared to locking liquidity in longer term.
What are the Kwacha yield curve hotspots?Currently Zambia’s best spots are 27.5% in the one year and 33% in the 5 year tenors. However given widened yields for offshore assets such the non deliverable forwards the real yield on government securities after tax are still unattractive to offshore players given currency risks as the Bank of Zambia grapples with falling reserves.
In totality the central bank was shy of its target by K11.8billion ($895million). With this gap it is highly unlikely that the MinFins 6.5% fiscal deficit will be met given rising risks to growth. 2020s 5.5% could be a mirage given that next year will be a very similar year to 2019 in dynamics.
The Kwacha Arbitrageur
