As Easter approaches, Zambia, Africa’s second-largest red metal hotspot, anticipates a short week ahead with markets closing from Friday, March 29th to Monday, April 1st. This week brings optimism surrounding recently announced eurobond restructuring, the third Kwacha bond sale of 2024, March inflation data released by the Zambia Statistics Agency, and April petroleum price announcements by the Energy Regulation Board.
READ ALSO: On the Cusp of Debt Restructure, Zambia Restarts Negotiations with Dollar Bondholders
Here are some insights into these pre-Easter market developments:
DEBT DEAL TO GIVE KWACHA A POSITIVE CUE
As an early Easter gift, Zambia has reached an agreement with its eurobond holders in a significant development. This agreement comes approximately four months after an in-principle agreement was rejected by the Official Creditor Committee (OCC) and the International Monetary Fund (IMF), citing concerns about comparability of treatment in line with the G20 Common Framework. This development indicates that Zambia is on the brink of a rating upgrade with international credit agencies after 20 months of default status, which has incurred high premiums on capital pricing for the nation. This achievement follows Zambia’s attainment of $6.3 billion in bilateral debt treatment. Zambia anticipates improved investor flows and increased interest in its bonds as offshore investors lock in yields before the curve compresses. In the short term, this could provide a positive signal for the Kwacha as market offloads increase. The Kwacha has been on a tumultuous trajectory, prompting the central bank to raise the statutory reserve ratio to highs of 26%, while the benchmark interest rate was last raised to 12.5% in the first rate decision meeting of the year.
Zambia is 20 months into a 38-month $1.3 billion extended credit facility. The debt reorganization occurs under President Hakainde Hichilema’s administration, fulfilling an electoral promise to the citizenry. While this has broadened Zambia’s economic production possibilities, growth still faces headwinds from the El Niño-induced drought, which continues to affect power generation and crop output for the 2023/24 farming season.
INCREASED INTEREST AND GREATER PURCHASING POWER IN BOND SALE
This Thursday, the Bank of Zambia will seek to raise K2 billion in bonds in the third debt sale of the year. Expectations have shifted overnight with the restructuring development, making Kwacha-denominated bonds attractive as the yield curve is expected to compress soon. The copper producer’s market experienced low purchasing power in the last bond sale due to liquidity bottlenecks caused by the central bank’s sterilization action to mop up excess liquidity from the market following a 9% cash reserve ratio hike to 26% on February 5th. This week’s auction is forecasted to see an improvement in purchasing power due to improved liquidity conditions. Significant interest is expected in longer-dated tenors, especially from pension funds and offshore investors seeking attractive returns on their investments.
INFLATION EXPECTED TO EDGE HIGHER
The Zambia Statistics Agency will release its March consumer price index, with expectations of inflation increasing from the current 13.5%. Rising food prices due to intensifying drought are likely to widen current levels, although slowed by recent currency appreciation that eased cost-push pressures. However, cost of living pressures persist due to elevated petroleum prices and other supply chain-related factors. Risks to inflation remain high due to 8-hour power rationing and increased fuel usage for backup power purposes.
PETROLEUM PRICES TO RISE BY 2.5%
The Energy Regulation Board will release petroleum prices for April. Given the 4% average global increase in crude prices, offset in part by a 1% net appreciation of the Kwacha, petroleum prices in Zambia are expected to rise by anywhere between 1.5% and 2.5%. Crude prices continue to be influenced by geopolitical tensions and OPEC+ decisions affecting supply.
The Kwacha Arbitrageur