As Africa’s second largest red metal producer Zambia grapples with a protracted debt restructure quagmire, investors propensity to redeploy liquidity in Kwacha assets is fading. Zambia’s central bank in its sophomore bond offering of the year held on Friday February 17, sold 25% of assets on offer, the weakest performance in 26 months.
Of the K2.7 billion on offer, the Bank of Zambia recorded slightly over K645 million in proceeds, a deep undersubscription reiterating ambiguity and uncertainty in the Southern African market. Yields across the curve were unchanged save the 2 year which rose 50 bps to 18.0%. Risk skew for the dismal sale was concentrated in the 2-3 year tenors housing 69.0% of the proceeds as players exercise restraint in lengthening duration.
Despite over a billion Kwacha in maturities in the last few weeks, investors propensity to re-invest in government securities was weak is which is likely due to a plethora of factors ranging from uncertainty and the commercial banks focus on meeting their statutory reserve ratio requirements.
MONETARY TIGHTENING BEGINS
A very eventful week with monetary tightening, the first benchmark interest rate hike in a year when the BOZ scaled its policy rate 25 basis points to 9.25% exactly 2 weeks after the regulator tightened statutory reserves by 250 bps to 11.5% for both the foreign and local currency side. These sterilization measures were targeted at reigning in on widening pricing pressures after the copper currency reversed all its post August 2021 ‘confidence induced’ rally.
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One of the key themes re-echoed by central bank governor Denny Kalyalya, was the protracted debt restructure that is breeding market weariness and ambiguity in the financial market. Other risks cited were offshore holdings in government securities which are transmitting asset sell off pressure in capital repatriation thereby exacerbating currency weakness.
With a rising inflation forecast given rising upside risks to consumer price index, interest rate outlook could be trending bearish with odds for higher term funding widening.
The Kwacha Arbitrageur