LUSAKA (The Business Telegraph):- With liquidity north of 3 yards in Kwacha terms into the twenty first treasury bills sale held on October 08, the central bank in Africa’s copper producer sold only K458.3million worth of short dated government securities in cash terms. This is one of the weakest subscriptions, at 35.2% of K1.3billion the of the total assets on offer, the year has seen after a series of exceptional performances in the short end of the Kwacha yield curve. With the 36.7% increase in government security auction size for 2H20, a decline in treasury bill subscriptions could add pressure to the fiscal purse.
The Bank of Zambia has been active in open market operations since April providing adequate liquidity to cushion COVID related credit shocks. This was part of a central bank balance sheet expansion program characterized by a domestic debt restructure through bond buy-backs in part lengthening duration, quantitative easing and general government security consolidation. Given the amplified fiscal fragilities that the copper producer faces as a result of COVID pandemic, risk skew has been for shorter dated assets than for longer dated fixed income instruments. Treasury bill performance as measured by bid – cover ratio to date, stands at 113% versus bond auction dismal outcomes are pegged at 43%.
EVERY COUNTRY ‘AAA’ FOR ITS OWN PAPER BUT ISSUER RISKS DEEPENING
The asset gold rush by players seems to be peaking as most commercial banks near limit up. With long Kwacha positions as measured by aggregate current account balances it is becoming harder to book sovereign risk on balance sheets. Commercial banks have over the years been required to provision 100% of running government securities given the deteriorating credit posture of the country. This clearly defies the adage that every country is AAA rated for its own paper.
MARKETS FLUSH KWACHA BUT ASSET ATTRACTIVENESS FADING
More players seem to be sovereign limit up as the last few auctions have seen high appetite for assets especially in the one year paying 24.5% from 29.25% the highest seen in 2020. A decline however in subscription spells funding challenges for fiscal programs especially that the authorities will now seek to use the domestic money markets to raise public finances as the MinFin reigns in to curb external debt accumulation. Despite running long Kwacha, the Zambian markets still grapple with dollar liquidity which continues to fuel Transfer and Convertibility (T&C) risks incapacitating effective conversion of local currency to foreign exchange for key counterparties.
Other drivers of offshore inertia in taking government risk include the deterioration of sovereign fiscal profile of the copper producer. Zambia is in the middle of a debt restructure program that has gyrated between dollar bond holders pushing back on a solicitation request and Chinese creditors flagging arrears on obligations that are falling due. Zambia was recently downgraded to a level above default on the back of cashflow and structural hurdles in potentially meeting its debt obligations in disease pandemic period.
The Kwacha Arbitrageur