Markets in Africa’s second largest copper producer Zambia just got a fret in their outlook as the debut bond sale printed yields a few basis points higher. The Bank of Zambia was only able to satisfy K1.9 billion of the K2.9 billion appetite in bids pushing the 3,7 and 10 year points on the demand curve 100, 150 and 140 bps higher to 20.5%, 24.5% and 25.5% respectively.
Friday January 21 outcome, strengthens the case for yield rate bears whose signs were earlier detected on the treasury bill end of the Kwacha curve. In the last 8 weeks, the yield curve has seen the 6, 9 and 12 months tenors scare higher in three respective debt sales while the first bond auction of the year repriced higher confirming interest rate bears.
INCREASED FISCAL FUNDING NEEDS WILL PRESSURE YIELDS
With the central banks increased appetite for both bond and T-bill auctions to fund the 2022 fiscal budget, it was expected that yields would be pressured upwards. The earlier support from the effects of the state of the global economic marred by a COVID pandemic pointing liquidity to emerging and frontier market assets, Kwacha inclusive, offshore players are caught in the labyrinth of uncertainty around a clear US Fed stance on potential hikes this year. As such could be holding liquidity to lock in US treasuries should the rate hiking cycle start. The muted secondary market activity seems to suggest a liquidity constraint or that offshores have exhausted appetite in EM assets explaining the undersubscription seen in Friday’s sale.
HIGHER TERM FUNDING COSTS BUT ATTRACTIVE FOR INVESTMENT PURPOSES
As for indigenous players, ebbing inflation and widening yields just made the assets attractive as premiums are widening offering a decent compensation for taking sovereign risk. However the climb in yields signal higher term funding costs that could impact cost of credit in an economy looking to recover from pandemic amplified fiscal hurdles.
The Southern African nation awaits an International Monetary Fund (IMF) special board session to approve the $1.4 billion Extended Credit Facility (ECF) for which consensus was reached with the lenders staff mission team in December 2021. The IMF deal remains a precursor to the debt restructure process estimated to complete by end of 1H22. Until then the copper producers sovereign risk profile remains constrained whose effects while reflect in the domestic money and foreign exchange markets.
The Kwacha Arbitrageur
