The chaotic state of the global environment continues to drive investor behavior with most seeking safe haven for their liquidity. Most offshores continue to seek refuge in dollar denominated assets, typical in times of uncertainty, and additionally emerging market assets like bonds especially in nations that are on International Monetary Fund programs. One jurisdiction seeing an influx of offshores is Zambia, Africa’s red metal hotspot whose risk skew for fixed income has shifted to longer dated higher yielding govies from shorter dated higher yielding. This comes in the wake of economic recovery prospects boosted by an extended credit facility approved by the Washington based lender.
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Friday September 17th bond sale saw an influx of purchasing power with bids totaling K5.4 billion of which 47% at cost were absorbed. This is the first full subscription since February of this year with fairly spread interest across 2-10 year tenors. As offshores that took big bets on the Southern African nations fiscal recovery, the debt sale saw the highest interest in 10 year bonds.
The secondary dollar bond market continues to see exits in stock holdings of Zambian Eurobonds as investors hedge against 30-35% haircut risks. This has triggered a flow of exit proceeds into predictable Kwacha government securities. This is supported by a firm kwacha sovereign bond index trading 15.05% firmer in dollar terms surpassing the S&P500 index and as such a safe haven for dollar bond holders averting haircut risk as restructure deliberations proceed.
“The IMF deal informed the global fixed income investor community that due to fiscal vulnerabilities of the copper producers economy, local currency bond exposures will be restrained and ring fenced as such, this makes them less risky than dollar bonds supported by foreign exchange stability guaranteed impliedly by the lender,” Zatu Financial Consultants Managing Partner Munyumba Mutwale said in a note to clients.
Other analysts remain of the view that asset sell off pressure will mount in the Eurobond market but could potentially create demand for Kwacha government securities as an attractive hedge for dollar bond market exit risk. Kwacha assets are currently paying between 22.00%-27.75% in a currency stable and inflation ebbing environment.
Zambia seeks to restructure its debt by year end and until then the credit rating agencies will wait to improve the copper producers foreign currency long term issuer rating.
The Kwacha Arbitrageur
