It could be debt restructure o’clock in Africa’s second largest copper producer Zambia. At the Summit for a New Global Financing Pact starting today in France, Zambia could get its long awaited breakthrough surrounding creditor assurances a development that will unlock disbursement of the second tranche of the International Monetary Fund Extended Credit Facility. Much as this week is studded with sanguine debt restructure expectations clarity, the Southern African nations central bank will seek to sell K2.6 billion worth of bonds in its sixth fixed income sale of the year. The week has seen currency volatility with massive swings exceeding the 200 day moving average as markets remain eager and elastic to news surrounding debt rearrangement break through.
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In the same week, the Bank of Zambia capped the limit on participation of non resident investors in the primary market for government securities. This will now be limited to 5% of issuances which has bee dubbed as a move towards debt sustainability efforts. The central bank has been on a quest to stimulate more secondary market trading which arguably is a move to improve governmt security liquidity (trading), other schools of thought have not ruled out the possbility of this being a precondition of the imminent debt proposal expected in the week.
Commenting on the matter ZATU Financial Consultants Managing Partner Munyumba Mutwale said, “China has a problem because their debt with Zambia is in form of direct loans while obligations with the west are in form of Eurobonds, mostly securitized. Dollar bond holders can evade haircut impacts by selling their asset holdings and in turn buy government securities which are currently cheap enough to offset any haircuts from the restructuring process.”
“Whether capping the off shore participation to 5% of issuances will be effective is not clear because the move could turn banks into agents of offshore clients. Nothing stops banks from buying in the primaries and thereafter offloading to their offshore clients who are unrestricted in their bond buying in the secondary market,” Mutwale said.
Opportunik Global Fund Executive Head Trader Dean Onyambu said, “The 5% offshore cap leans into the narrative that debt restructuring is almost concluded, which is positive. The current global investment landscape suggests that Emerging and Frontier Market central banks such as the Bank of Zambia are at the tail end of their tightening cycles. Moreover, a broadly weaker dollar is anticipated in 2H23, followed by deeper dollar weakness in 2024, when the US Fed potentially pivots from pausing to cutting rates. Therefore, should we get an official confirmation on debt restructuring, we can expect an uptick in portfolio flows into Kwacha bonds over the next 3 – 6 months.”
“That said, I still favor the view that once a bottom is established within that initial 3-6 months hot money wave, the dollar kwacha trajectory will likely shift to a slow upward trend over a multi-year period based on a resumption of debt service outflows as well as a steeper requirement for the BOZ to accumulate foreign exchange reserves. As a result, I anticipate that we will likely see a return of the BOZ on the bid side in the foreign exchange market. In fact, the BOZ will likely need to provide a liquidity filter for the anticipated flurry of portfolio inflows as the current FX market structure is not designed to function effectively with massive amounts of liquidity flowing in continuously. The FX market structure alone can be a catalyst for a very sharp downside move if the BOZ does not come in to buy USD.” Onyambu said in a note.
Much as the outlook for the red metal producers seems brighter, the bond auction is to some extent expected to attract decent purchasing power from local players seeking to harvest mark to market gains for trading purposes. The last four bond sales have been undersubscribed with the last two impacted adversely by the change in pension fund policy that allows for 20% cash in on retirement savings. Zambia’s government security primary bond yields range between 18.0% – 27.5% on the longer end.
Zambia’s head of state Hakainde Hichilema, Chinese China’s premier Li Keqiang and the current co-chairperson of the creditor committee with China – French President Emmanuel Macron who will be present at this week’s summit. Debt restructure breakthrough is critical for the copper producer as it seeks to unlock further IMF funding and restoratioon of fiscal fitness.
The Kwacha Arbitrageur
