Zambia is known for two things globally – red metal mining (copper) of which it is Africa’s second largest producer and is also the home of one of the worlds natural wonders, the Mosi -o-tunya falls. For the purpose of this article, I will glean more towards the latter.
“Dr. Livingstone I presume,” Henry Morton Stanley said to him on the shores of lake Tanganyika at Ujiji village in 1871. I always knew this scene as part of my history faculty. However not in the context of capital markets. It was at an ACCA capital markets workshop, at the Radisson blu hotel, 7 years ago that then Stock Brokers Chief Executive Mr. Charles Mate, used the analogy of Henry Morton Stanley’s traceability of David Livingstone to make all of us understand the importance of visibility in capital markets. How did Henry Morton Stanley trace Dr. Livingstone? The answer is easy. Livingstone wrote letters to Scotland back home and always drew maps of his whereabouts which then aided Stanley to find him. This was Mr. Mate’s opening speech at the workshop.
How then does this relate to capital and financial markets? For two years running we can appreciate efforts by ABSA Africa in developing an index that monitors the state and health of markets for 20 key economies in Africa. This index should be taken very seriously by regulators to engrave the pillar findings in their policy frameworks. The 6 pillars ranging from access to FX markets to capacity of local investors are rigorously inclusive. So then how will an investor in Khazakstan know about Zambian assets? What will provide the requisite visibility to deepen markets and widen the array of financial instrument offering in Zambia? It is not a secret that this is a systemic weakness across Africa fueling ‘over concentration’ to risk free assets by state pension funds such as bills and bonds which is the norm.
Read: ABSA Africa’s Head of Markets interview on Kenya’s performance on the ABSA Index
Read: ABSA Africa Financial Markets Index ranks Zambia 8th on the continent
A depressed capital market
There was a time in the history of Zambia when IPO’s or debt issues were prevalent on the Lusaka Securities Exchange -LuSE. Barclays and Investrust had issued and listed debt instruments while the likes of Airtel, Zanaco, ZAMEFA and Madison made it to the score board of the bourse in primaries. Capital market activity has declined significantly as measured by the muted IPOs or any form of debt or capital raising. This could be impacted by the fiscal challenges manifesting in volatile monetary environment but what lacks in the Zambian market is market making skills. I love the term clairvoyance which speaks to the required caliber of traders this market lacks. The lads just can’t take risk though outliers do exist from exceptional traders that i have seen move the markets from their desks.
No market misconception
I was once mentored by a Bonds Trading Head whose name i will withhold, that said, “you don’t have to wait for market existence but must create one in order to facilitate trade.” Where ever he went, discount assets sold irrespective of how illiquid the markets were. He always had a curve in his mind. It made me realise why the group sent him to African jurisdictions that are dubbed illiquid. One other line he used that got me thinking was, ‘any country is triple A rated for its own paper,’ that’s irrespective of the external rating agency country benchmarks.
Zambia may be rated Caa1/B3 by Moody’s/Fitch/S&P but that doesn’t stop ‘market making’ from trading these assets. Sometimes what the world deems ‘junk’ therein lies the opportunity for margin from an asset undervaluation perspective. Zambian trading desks have shied away from Eurobond trading citing little credit risk appetite for dollar denominated assets and that further, local expertise are not centers of excellence for dollar interest rates. However, what we forget is that this trading spiral then reduces the instrument offerings, affecting market depth ultimatley.
On Sept 19 of 2013, the International Finance Corporation – IFC issued the $28mn Zambezi bond as part of a program to deepen the countries capital markets and access to finance. Very few if none of the local trading desks booked this risk on their balance sheet despite the counterparty being AAA rated. Being a kwacha denominated offering the spread acceptable was 150bps above government curve but most if not all market players where too averse.
According to the Capital Asset Pricing Model – CAPM two classes of investors exist. The first is one where the bulk of investors fall – those with affinity for minimal yet guaranteed returns. However this class has been blinded to believe this is the maximum return they can ever get for taking risk. This class covers those who love bonds and bills. I want to call the second class of investors ‘kamikaze’. These are risk takers that believe guaranteed minimal returns are the starting point but have appetite for a higher premium above. They have sanguine appetite for a few basis points above the risk free to earn higher. This is the class that is rare in the Zambian market and if there are any, they should take credit for the minimal secondary market activity and compensated by earning higher premiums.
Restrictive banking licenses
Central Banks have not made it any easier by offering ‘restrictive banking’ licenses that constrain trading of derivatives which are key to providing structured solutions to the markets. The market has potential for commodity hedging and a wider array of instruments such as interest rate swaps, currency swaps and general interest rate trading. The gap between all African nations and South Africa (the most advanced market) will only be narrowed by adjusting risk appetite and the right will from regulators to support market making.
To date it is saddening that secondary market pricing cannot be published centrally to allow for price discovery to aid ‘mark to market’ accounting for asset revaluation. Even the benchmark bonds and increasing the frequency of debt sales has not assisted in deepening markets at all.
The role insurance and asset managers have failed to play
Asset managers and insurance companies have played little roles in deepening markets through taking interest rate risk as part of the asset liability mixes. Their pool are very shallow. It is only until late last year that the pensions and insurance authority had its act revised to force these surplus units participate in the markets. With more players on the market taking risk, de-risking of state pension funds will result to allow them free funds for other investment uses. This in itself is the ‘crowding out’ effect.
Weak regulatory will to enforce listing on multinationals
Most multinationals have failed to list on the local bourse because of earnings management techniques that result in reporting of deliberate losses. After all profitability is a prerequisite for listing on any bourse so loss making eases pressure on multinationals from having to dilute shareholding through listing. This then disqualifies them from selling shares to the public through listings depriving Zambians stake in them. Maybe that is why mining entities have failed to list despite operating for decades in Zambia. Even when regulators know the problem, very little will is shown as to enforcing the need for multinationals to list. A good example is MTN that has been in operation for decades in Zambia and the license granting was on condition that at some point listing would result. To date MTN has not listed with the closest debut being the Ikhulileni failed IPO which was a very complex structure which the regulator blocked from continuing due to irregularities a decision taken in the best interests of Zambia.
Lack of market visibility
I’m reminded of the corporate bond market in Africa dominated by Nigerian, Kenyan and South African paper. The Zenith Banks, Eskoms, GTB, Illovo Plc’s to mention but a few. I only got to understand that these entities were visible because of factors ranging from dual listings on bourses to being rated by credit agencies such as S&P, Moody’s and Fitch to include other local vehicles. Rating is the best thing that can ever happen to an entity because of the benefits that accrue with a credit risk grade. This includes easier access to capital and some form of visibility. A rated entity will attract a narrower credit spread than one not rated at all. Zenith Bank bonds that are AAA rated and are far more liquid than sub Saharan African country bonds that are junk rated.
Zambian corporates are not rated
The setting up of a rating agency in Zambia some time last year was a long overdue step that should have been taken years back. The rating agency should now focus on rating corporates in line with international best practice. It was impressive when Cavmont and Indo Zambia were A rated but one wondered when all other banks would follow suit as industrial practice. Most Zambian corporates are not credit rated at all and this makes it difficult for risk profiling purposes. Locals are yet to comprehend the importance of being credit rated to access capital markets. Rating a company will earn it endless benefits just like Zambia’s first S&P rating led to investors oversubscribing its debut for $750mn in the dollar debt market. Rating is an easier language for investors to understand than mere pronouncements about an entities potential.
