As Easter approaches, Zambia, Africa’s second-largest copper producer, achieves a significant milestone with news of the restructuring of its dollar bonds. In principle, Zambia has agreed with the bondholder committee to issue two new bonds maturing in 2033 ($1.7 billion) and 2053 ($1.35 billion), effectively reorganizing its outstanding Eurobond debt. This marks the second proposal following the November 2023 agreement, which initially faced reservations from the Official Creditor Committee (OCC) and the International Monetary Fund (IMF) regarding comparability of treatment concerns. However, both parties have now given their approval, signaling a positive shift in Zambia’s sovereign outlook prospects.
READ ALSO: Amidst Tight Liquidity, BOZ Deprives Sophomore Kwacha Bond Sale of Purchasing Power
Coinciding with this development is the third bond auction of the year, where the Bank of Zambia (BOZ) aims to raise K2 billion in fixed-income assets in the 28 March BOZ primary auction.
The previous bond sale fell short of expectations due to a liquidity-constrained market, attributed to a sharp increase in the cash reserve ratio by 9% to 26%. However, liquidity conditions have since improved following security maturities and other funding options, which are expected to bolster purchasing power in this week’s auction.
READ ALSO: BOZ Monetary Tightening Curbs Kwacha Slide, Tames Demand and Subsides Speculation
The spread between the Zambia interbank rate (zibor) and the monetary policy rate has narrowed to below 6% from levels of close to 9% reflecting improved liquidity conditions for banks. This has widened the odds of decent purchasing power in Thursdays bond sale.
The restructuring of dollar bonds suggests a potential compression of the Kwacha curve, likely prompting investors to seek current yields. Consequently, interest in Kwacha assets is anticipated to surge, coupled with improved cash conditions, providing funding for the debt sale and potentially improving subscription rates.
Despite the 5% cap on offshore participation in the total auction size, it is expected that local banks will bid on behalf of international clients.
Zambia’s recent bond restructuring paves the way for enhanced purchasing power in Kwacha bond primaries, offering potential opportunities for investors in an evolving financial landscape.
Kwacha Arbitrageur
