The central bank in Africa’s copper producer Zambia, seeks to sell K13.6bln ($755mln) worth of government securities in the third quarter of 2020. According to a public notice on tenders and issuance calendar, the Bank of Zambia will increase its bond and treasury bill offerings by 37% in the third quarter. Treasury bill offer size will increase to K1.3bln retaining a fortnight frequency while bond offer size will widen to K1.5bln with monthly frequency.
It is about a dry point of construction that a higher auction size reflects rising funding needs for fiscal programs which is very expected after a tumultuous 1H20 ravaged by disease pandemic. Never in the history of Zambia, Africa and globally have funds been diverted to fund public health and us such caused budget distortions requiring funding to be provided by central banks and fiscal collaborations. Zambia’s fiscal position deterioration was amplified by COVID19 effects which the copper producer has responded by taking urgent steps to reorganize its elevated external debt and commence talks with the Washington based lender the International Monetary Fund – IMF.
POSITIVE SENTIMENT A RISK APPETITE BOOST, GLOBAL LIQUIDITY SEEKS ASSETS TO HOUSE
Monetary stimulus brewing excess liquidity. Global markets are cash flush as a consequence of central bank stimulus and interventions from the US Fed, Bank of England – BOE, Peoples Bank of China -PBOC and the European Central Bank – ECB as the seek to keep the financial environment afloat. As economies re-open and record rebounds growth demand for riskier assets is growing, as such this liquidity will seek housing in assets such as commodities, stocks and emerging – frontier market paper inclusive.
Debt restructure making Kwacha govies attractive. This coupled with a glimmer of positive sentiment following Zambia’s steps towards restoring fiscal fitness has evidently clawed back eroded appetite in its government securities. The central bank sold K818.5mln with of fixed income securities, an 86% subscription rate, in Friday 26 June debt sale which was the highest amount sold year to date. offshore interest was fueled by more positive sentiment around Zambia’s outlooks given debt restructure prospects by Lazard and a likely bail out package with the IMF which will attract flows into the veins of its economy. The central bank step to widen its funding net could be anticipation of greater flows seeking yield to house in.
Greater inertia for yield climb down. The rise in borrowing appetite however could steepen inertia for yield climb down in an environment masked with higher yields across the tenors. The low uptake by commercial banks in the medium term refinance facility has slowed the transmission of lower funding costs to banks balance sheets for onward passing to counterparties. According to a Status Update on the K10bln on 30 June, the central bank has approved K3.8bln in applications yet disbursed only K875mln.
The shorter end of the Kwacha curve has continued to climb down with 150bps rally in 1yr bills to 26.5%, while the 3m and 6m fell 100bps to 16% and 20% respectively in the Thursday 02 July treasury bill sale.
The Kwacha Arbitrageur
