Amidst monetary tightening conditions in Africa’s red metal hotspot, Zambia, the central banks sophomore Kwacha bond sale was deeply undersubscribed. A tumultuous time it has been for the Kwacha that shaved close to 58% in value from July 2023 to date the Bank of Zambia has been on a monetary tightening streak with a 900 basis points upward adjustment to 26% effected on 5th February as the regulator sought to rein in on a steep slide. This was anchor to fueling of widening cost of living pressures.
The sterilization measure has the left the market net short as the demand curb aggressive initiative has not only manifested in currency appreciation but has deprived the market of purchasing power generally. Of the K2 billion worth of assets on offer, the Bank of Zambia sold K1.13 billion (representing 56% of the sale) of the K1.24 billion of bids in Friday 16 February auction.
Debt sale skew was 72% of the appetite in the longer end namely the 7 and 10 year tenors representative of players with a long term view on Zambia’s economic prospects. Yields in yesterdays debt sale were unchanged however market analysts remain of the view that with tighter monetary conditions such as a 150 bps hike in policy rate, cost of funds has started to climb amidst a deposit mobilization war as the commercial banks seek to cushion impact of a higher cash reserve ratio.
In the labyrinth of an International Monetary Fund extend credit facility, it has become more vivid that some of the recent policy actions are linked to technical memorandum of understanding signed with the Washington based lender and that the BOZ still has latitude to tighten policy even further in the next coming months. Compliance with the MOUs remain critical Zambia’s ability to access further disbursements. A little trip down memory lane reveals that Zambia had the highest cash reserve ratio at 30% in 1995 period at a time when the copper producer was on an IMF Structural Adjustment Program (SAP).
Zambia seeks to close on a debt restructure overhang within the first half of the year as it continues to make strides with addressing private debt comparability. Until this quagmire is resolved sovereign risk posture will protract a foreign currency rating upgrade that is the key driver of unfairly priced capital.
As at 4.30pm on Friday 16 February in the capital Lusaka, the copper currency was trading for K24.65 after a 5 day rally, the first seen since April 2023.
The Kwacha Arbitrageur
