Waning sentiment in Africa’s red metal producer, Zambia is eclipsing the autopsy effects of the central banks monetary policy sterilization measures. The Bank of Zambia of 14 and 20 November (a week apart) gave financial markets a fair dosage of monetary policy tightening after a thousand basis point hike in the emergency funding rate to commercial banks to 28% and 125 basis point upwards adjustment in the benchmark interest rate to 11.5% respectively. The copper currency hit and all time low of 14.85 in intraday trading after settling at 14.75 in bid price.
Value added tax refunds haven’t made it any easier in flooding the market with liquidity that has made dollar funding unsustainable. This has had the net effect of reducing conversions by the mines because they are flush Kwacha as such the market remains short dollars. Market liquidity as at close of business on 26 November was K1.4 billion signaling ample purchasing power into Friday’s one yard bond offering.
“Offshore sentiment is anemic as players worry about underlying fundamentals. This is evidenced by a 400 bps widening in non deliverable forward yields and exit appetite out of government securities,” a trader in the capital said in a morning note.
The market expects maturities in excess of K4.1 billion of which K1.3 billion is in bonds. Half for the bond maturities are will be proceeds for offshores that are highly likely not reinvest but will repatriate after dollarisng adding more pressure on the Kwacha.
Credit default spreads on Zambia’s dollar bonds for maturity 2022-2027 have blown out to record levels of between 1,650-2,150 bps, the worst performing Eurobonds after Mozambique’s 2023. Zambia’s foreign currency denominated paper is paying between 18.78% – 23.8% on the bid side.
The Kwacha Arbitrageur
