Global monetary tightening continues to theme bond appetite for offshores with mixed themes in financial markets. The inflation quagmire remains core to investment decisions as the west remains in the labyrinth of aggressive interest rate hikes to tame the consumer price index scourge. Africa’s red metal producer Zambia will seek to raise K2.6 billion in a 2,7,15 year non-benchmark bond re-issuance and a 3,5 and 10 year new benchmark bond issuances. The Southern African nations credit risk posture took a positive cue from a $1.3 billion extended credit facility that serves as a precursor to successful debt restructure following fiscal vulnerabilities in unsustainable debt levels.
Kwacha bond index, a winner in dollar terms
The Kwacha bond index remains fairly attractive at 15.96% in dollar terms year to date supported by decent yields and a stable exchange rate. This has been fueled by a leap in sentiment following greater political will to address fiscal vulnerabilities. However the chaotic state of the global macroenvironment has continued to exacerbate asset sell off pressure given safe haven appetite of dollar denominated assets. This is by default eroding purchasing power into emerging market assets, Kwacha fixed income inclusive.
Inflation is still a global headache
The US Fed and the Bank of England are likely to continue hiking benchmark interest rates to curb inflation that remains fairly high. With inflation print coming in higher at 8.3% though ebbing in tandem with strong job market data it likely that offshore players are more confident the rate hike cycle is yielding results that could make treasuries attractive in the medium term. However stock market performance has remained resilient and is the likely avenue that investors will seek to bet on.
Restructure quagmire widens odds of sell off pressures
With Zambia in the middle of a debt restructure after the IMF granted bailout of $1.3 billion money managers are seeing deep haircuts of up to 35% and this has caused asset sell off pressure in the dollar bond markets. This on the face of it makes off-shore participation in local bond auctions unlikely in the next 3 months as global asset managers try to digest this paradox. Morgan Stanley see’s Zambia bond restructuring losses to be more than expected and that a ‘super bond’ is possible.
READ ALSO: Zambia bond restructuring losses to be more than expected, ‘super bond’ possible – Morgan Stanley
IMF bailout echoes better economic prospects
Zambia’s economic fortunes were brightened by a bailout package by the Washington based lender after the IMF board approved an ECF for which $185 million has been disbursed already. With debt restructure in progress it is forecast that some players will seek to lengthen duration in longer dated bonds as they price in stronger economic fundamentals in the medium to long term. Zambia’s outstanding dollar bonds sold off last week after the MinFin said it would not be liquidating the $750 million 2022 paper due in September unless new terms were agreed with the holders.
For local purchasing power, the bond yields and current single digit inflation provides an attractive risk premium for trading yielding anywhere between 17.5% to 27.275% with an CPI of 9.8%.
The Kwacha Arbitrageur
