Treasury bills in Africa’s second largest copper hotspot Zambia just got 140 basis points unattractive in real terms when February annual inflation rate spiralled to 13.9% from 12.5% in January. The February headline CPI narrowed the compensation premium for market players with high affinity for risk in government paper. The copper producer grapples with rising energy risks and a depreciation currency whose effects, the business ecosystem has borne the brunt of to ebb selling prices higher. (Inflation erodes purchasing power. The difference between government yields and inflation represents the premium above which investors are compensated for taking risk in sovereign paper – premium = yields (%) – inflation(%)).
Appetite for shorter dated but higher yielding assets. In the fifth treasury bill sale of the year held on 27 February, the Bank of Zambia (BOZ) was able to satisfy only K1.13billion of the K1.42billion appetite in nominal terms raising K927million ($63million equivalent) of the K950million assets on offer. Auction skew was concentrated in the 1 year accounting for 50% of the allocation while 27% of liquidity was housed in the 9 month. Bid cover ratio was 123%.
Kwacha demand curve reflecting fiscal risks. Yields were fairly unchanged with the 1 year paying 29% while the 9 month is priced at 27%. Repricing risks remain high signalling rise in cost of funding. Global rating agency Standards and Poor’s (S&P) adjusted Zambia’s long term issuer rating in addition to its transfer and convertibility risks to ‘CCC’ (-ve outlook) from CCC+ (stable outlook) citing rising debt repayment risks. The Kwacha demand curve as a consequence is already reflective of the sovereign rating given rising fiscal risks.
Zambia’s fiscal posture is currently weighed by rising external debt which grew $1.15billion to $11.2billion (Dec19) while domestic debt ballooned to K80.2billion as domestic arrears widened to K26.2billion according to the MinFin.
The Kwacha Arbitrageur.
