Africa’s red metal hotspot Zambia on Friday, September 17 saw a sanguine surge in appetite worth of 5 yards in govies. This is the first bond sale after the Washington based lender the International Monetary Fund board approved a $1.3billion extended credit facility 21 months after the Southern African nation formally applied for financial assistance following a deterioration in its economic posture. Friday’s debt sale was a cocktail of both offshore and onshore investors that took risk on Zambia on the back of its bullish recovery prospects with 55% of this appetite housed in the 10-year tenor at 27.75%. The Bank of Zambia recorded its first full subscription of the year since February 2022, satisfying the K2.6 billion worth of assets on offer. The sale saw infinitesimal movements in the money curve.
It is evident that risk skew has over the last few months morphed from shorter-dated higher yielding to longer-dated assets which can only spell confidence.
“Offshores most likely snuck into the Zambian financial markets just after the IMF board approval and took long-dated bets on longer-dated government securities while locals are comforted by healthy spreads above inflation.” Managing Partner of Zatu Financial Consultants Limited, Munyumba Mutwale said, in a note.
Mutwale further pointed out that offshore investors, likely fearing the proposed 40% principle and 30% interest haircuts by the IMF, sold off their dollar bond positions and then re-entered the Zambian debt markets through the bond sale explaining the surge in appetite for 10-year paper.
“The recent Eurobond sell-off explains in part the sudden appreciation of the copper currency adding momentum to market behavior following IMF announcement. This liquidity found itself eventually in Zambian bonds on the longer end. More exits are anticipated in the Eurobond markets which could breed higher appetite for Zambian government securities and other emerging market longer dated assets in subsequent auctions,‘’ Mutwale said.
The auction also recorded decent purchasing power in the 3-5 year tenors that are usually dubbed the sweetest spots on the Kwacha curve. These are currently priced at 22% – 24%. The Zambian government local currency sovereign bond index, year to date, in dollar terms is 15.05% firmer representing a 0.52% ebb, while the index is 0.4% softer in local currency terms at 7.9%. The stock market index still is firmer at 20% in local currency terms supported by banking, energy and agribusiness equities.
Concerning Zambia’s debt restructure journey, money managers globally have slammed the proposals to restructure debt through deep haircuts classifying them, as arbitrary even after the IMF bailout under the G20 common framework. With mixed themes in the global financial landscape, offshores players are still forecast to be edgy in the wake of the current complexities gyrating between tightening monetary policy to safe haven appetite for dollars. Calls for debt forgiveness have intensified but the capitalistic nature of private credit could breed further sell – offs in the dollar bond markets. The copper producers MinFin estimates that by year end Zambia’s debt would have successfully been restructured.
On the horizon is a maturity of the celebrated $750 million twenty four times oversubscribed 2022 paper which falls due this month but the authorities in the copper producer have stated that no redemption will be made in the absence of new terms as restructure deliberations continue.
The Kwacha Arbitrageur