The central bank in Africa’s red metal producer Zambia, has increased bidding thresholds for competitive and non competitive bids according to a press release on its website dated September 07. The minimum amount for competitive bids has been scaled to K500,000 (face value) from K30,000 per bigger per maturity tenor while the maximum bid amount for the non – competitive window has been adjusted to K499,000 (face value) from K29,000 per bidder per maturity tenor. Bank of Zambia decided to revise the thresholds to realign to economic changes and time decay since they were instituted. Other factors taken into account to adjust include inflation changes over the last 20 years and the central banks drive to enhance financial inclusion.
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Zambia’s securities have seen a surge of demand from offshore players given the state of the global economy marred by elevated inflation and ultra thin treasury yields causing a gold rush in emerging and frontier market assets. This coupled with increased sentiment as political risks subside in the wake of new leadership, the fixed income markets have seen record appetite circa K12.5 billion in the August 27 sale adding to more bids seen in private placements that have been on the rise as funding quagmires widen.
Given the current demand for government paper by offshores which has fuelled a currency rally, hiking the threshold allows retail players increase their investment appetite should they have greater pools of funds. On the face of it the Bank of Zambia could be attempting to curate the overcrowding effect of commercial banks in the money markets but ebbing yields below inflation thereby forcing them to lend to corporate credit and retail markets, investments by retail units will be adversely impacted. Zambia’s August inflation printed at 24.4% a few points below the new bond curve whose curve flattening was observed at the last fixed income sale that saw yields rally 606 basis points across on average.
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OFFSHORE HYPE WINDOW NARROWING AS US TAPERING COMMENCES 4Q21
The gold rush observed in the Kwacha fixed income markets will soon be short-lived as the US Fed announced a tapering starting in 4Q21 which could result in a reign on inflation and eventually result in attractiveness of their treasuries. When this happen emerging and frontier market assets will become unattractive to offshore players.
In the pen ultimate rate decision meeting announcement for 2021 on September 01, the monetary policy committee (MPC) communique reported that Zambia has continued to see record interest in government securities and that of those 45% were held by offshores.
The Kwacha Arbitrageur