In the labyrinth of an array of risk themes, global sell off pressure is catching up with the the fixed income market in Africas second largest copper hotspot Zambia. Supported by tamed inflation at single digit of 9.7% as the world grapples with price pressures and benchmark interest rate hikes, premiums above consumer price index remain healthy for local investors however currency depreciation is eroding attractiveness for offshores.
The Kwacha sovereign composite index rose 8 basis points to 23.72% as at December 22 which was 10 bps month on month and 317 bps year to date. The copper producers secondary bond market is currently experiencing a flight to quality by offshores seeking safer haven refuge in dollar denominated assets such as gold, U.S. treasuries and other gilts while primary markets are registering appetite in the shorter end of the fixed income curve.
“There is a risk theme that is clouding markets given convergence of global risks from geopolitical inflation autopsy effects while debt restructure delays is making offshores and locals fatigued in uncertainty,” Zatu Consultants Managing Partner Munyumba Mutwale said in a note to clients.
As expected, seasonal dollar demand for agricultural inputs has weighed the dollar yield on Kwacha bonds impacting their attractiveness to some extent. The dollarised sovereign bond index shaved 4.28% to 270.07 month on month but still 5.56% firmer year to date outperforming global market indexes that are still in the red.
The Southern African nation is at a critical stage of its economic life cycle with a debt restructure underway expected after the International Monetary Fund approved a $1.3 billion extended credit facility on 31 August 2022. However delays in getting private and bilateral creditors agree to common terms has kept Kwacha yield curve elevated in the 20’s and to some degree causing foreign exchange market nervousness.
Zambian authorities recently enacted into law a 20% cash in option on pension savings which could see the state pension fund alter its asset liability strategy as it seeks greater liquidity to absorb cash demand.
The Kwacha Arbitrageur
