Africa’s second largest red metal hotspot will seek to raise K2.6 billion worth of funding in its eighth fixed income sale of the year this Friday 18 August 2023. Zambia’s central bank could see increased purchasing power in Fridays Kwacha bond auction as the Southern African nation seeks to raise finance for some of its fiscal projects using the domestic money markets.
Hamstrung with debt for which it successfully renegotiate a $6.3billion bilateral obligation under the G20 common framework. In the July bond sale, offshore participation surged as the copper producers outlook brighten in the wake of an improved outlook. It is typical of offshore players to seek high yields which Zambia offers second to none but an improved sovereign outlook made it attractive for Kwacha bonds to house this liquidity ahead of a fall in interest rates.
“We see the government security curve coming down in the medium term when the ongoing private debt restructure completes, Fred Mulenga Treasurer and Investments Head at Zambia National Commercial Bank said during an economic review on the Copperbelt of Africa.
International rating agency Moody’s upgraded the copper producers local currency long term issuer rating to Caa3 from Ca, a positive cue taken from the bilateral debt restructure debt treatment. Earlier in July the MinFin released its 2023 – 2026 medium term expenditure framework that does spell a growth downgrade for 2023 on account of environmental headwinds affecting agribusiness and power generation. Markets will seek clues on progress on the dollar bond renegotiation which will signal effectively when the domestic money market overcrowding will cure to allow yields to fall.
“The Zambia bond trade, especially for assets with maturities exceeding 7 years, remains an attractive carry-trade opportunity, with yields currently surpassing 25%, compared to inflation just above 10%. However, for international investors, the currency remains the material risk, Dean Onyambu Executive Head Trading at Opportunik Global Fund said. Just this week, the Kwacha broke the key psychological level of 19.500 for a unit of dollar boosting confidence among short-term Kwacha bears and potentially paving the way for an upward move to 20.275. Beyond that, a return to the year’s high of 21.425 is possible, he said.
Onyambu cites that conversely, only a drop below 18.500 will instill confidence among short-term Kwacha bulls, and significantly, only a break below 17.000 will intensify confidence in long-term Kwacha strength. The longer it takes to finalize a signed Memorandum of Understanding (MOU) with bilateral and commercial creditors, the more likely it is that the USD/ZMW pair will reverse its recent gains from March, which were primarily driven by positive sentiment regarding a swifter resolution to the debt restructuring conundrum.
“Fiscal funding remains to a large extent funded by the domestic money markets for which offshores still find the current 20’s attractive as returns on their liquidity,” Munyumba Mutwale ZATU Financial Consultants Managing Partner said in a note to clients. Fitch has held Zambia’s ratings as is awaiting the conclusion of private creditor negotiations, he said.
New York Sterns University (NYU) database based on Moodys ratings has shown that Zambian country risk premium had dropped to by 2.5% to 18.2% from 20.7% as at 2H23 supported by re-rating making the current yields of 10 year bonds more appealing to the offshore developed market investors. Market analysts predict early days of the return to yield hunting which might see Zambia now in a more favorable light as opposed to past outlooks when yield hunters were in full force during our default and deterioration.
Additionally, given the global slowdown in rate hiking by developed central banks and a relative recession-less inflation cool down in Europe and the US there is capital now hungry for risk and return that would find a home in Zambia.
Offshores took a long term view on Zambia taking long dated risk 5-10 years in anticipation of economic turnaround. Being one of the most attractive geologies in Africa, the red metal producers fortunes are at brink of turning around given recent developments such as the launch of the largest nickel plant on the continent, new explorations in minerals such as graphite, lithium an copper, Chamber of Mines Chief Executive Officer Sokwani Chilembo said in Kitwe.
“Zambia’s debt restructure will play a key role in fairly pricing capital but only when credit lines open for the sovereign when the likes of Standards & Poor’s and Fitch upgrade the copper producers foreign currency credit rating,” Mutisunge Zulu Chief Risk Officer for Zambia National Commercial Bank said in a panel response at an economic review summit.
Mutwale does flag the backlog in foreign exchange demand, poor global copper demand and rising fertilizer prices globally which could drive forex volatility. If this holds, could hinder a full scale yield hunting.
The Kwacha Arbitrageur
