Five year term debt in Africa’s copper hotspot will now reprice higher to 33% at minimum on new credit as the 5 year bond just printed 50 basis points higher than in the last primaries. In the Kwacha fixed income debt sale on 29 November, successful bids for 5yr govies were priced at 33% and remains the sweetest spot on the Kwacha term structure of interest rates. Funds seeking yield will earn great margins in the five year but the cost of credit for term debt just ebbed bearish as new term loans will now be above 33%.
The Zambian markets prices term credit benchmarked against the government security yield curve such that an elevated Kwacha demand curve entails higher repricing risk costs. The market expected rates to soar higher given the perceived sovereign risks given pressures to growth and fiscal posture, the secondary market reveals that sentiment is waning as offshores exit Zambian local currency bonds ballooning asset sell off pressure thereby inducing currency depreciation sending the Kwacha to all time lows.
“The climb in the govie curve will drive a behavior that squeezes banks to fund their books with cheaper credit lines from multilaterals like the International Finance Corporation (IFC) and potentially could arbitrage with higher yields to earn wide margins in the securities market but at the expense of domestic credit which will be crowded out,” Economics Association of Zambia National Secretary Mutisunge Zulu said in an afternoon note. It’s a vicious spiral he said.
Corporate bond issuances could also be hampered by costs especially for entities that may attempt medium term notes in the medium terms because both institutional investors will need wider margins over and above 29.75% (3yr) and 33% (5yr). The widest repricing in Friday 29 November was the 15yr bucket which jumped 700bps to 28% which is good yield for pension funds.
“Very cheeky bids were observed in the bond auction a reflection of the perceived risks given the fiscal posture of the sovereign. With rejection of these elevated bids offshores will opt to purchase dollar to repatriate liquidity thereby mounting further pressure on the currency. It’s a lost chance for us to re-invest our maturities,” a London based fixer income trader advised.
Zambia grapples with a deepening energy crisis that has pressured its fiscal position adding stress to already existing debt sustainability concerns. Offshore players continue to price in the copper producers actualizing risks to growth.
The Kwacha Arbitrageur
