Zambia’s central bank will seek to raise K1.6 billion is a bond sale this Friday. This debt sale comes a fortnight after the copper producer successfully restructured its defaulted bonds with fresh instruments trading on the London Securities Exchange. More recently the Southern African nation got a nod from the three rating agencies namely Standards & Poor’s, Fitch and Moody’s that across the board upgraded the new bonds and rated the sovereign in positive light given the fiscal strides taken to restore fiscal fitness. Last Thursdays treasury bill auction saw a rally in yields between 100 – 150 basis points for most tenors. This significant increase reflects acceptance of expensive bids as players reflect the need for higher compensation for the level of risks such as currency.
One year money rose 150 basis points to 17.5% as 91 and 270 day yields widened a 100 bps to 10.7% and 11.7% respectively. Appetite for 1 year treasuries surpassed all tenors with bids totaling K1.23 billion (accounting for 64% of interest) of which a yard was absorbed. With a number of dynamics at paly to include improvements in the sovereigns outlooks backed by recent ratings that have levitated Zambia’s credit profile from prolonged default, market players anticipate decent interest from offshores that seek to house liquidity at risk reflective yields.
Several schools of thought have been of the view that longer dated fixed income assets have been overpriced given a stagnant bond curve that could see some correct in tomorrow’s auction. We anticipate a rise in yields across the spectrum from the 5 to 10 year, correcting the current status quo.
Another signal of potentially elevated yields in this coming auction is the S&P Zambia sovereign bond composite yield which has seen the highest monthly jump of 0.44% since August 2023. This signals that even the secondary market which had seen yields lower than the auction block is also pushing for higher yields going forward.
The Zambian authorities will seek to obtain approval for cabinet nod for a supplementary budget to be presented in the next week. This has skewed our analysis towards potential funding woes that have to be plugged in preceding auctions. However long counterparties have demonstrated preference for higher compensation premiums for taking sovereign risk in Kwacha assets.
Commenting on the matter First National Bank Country Economist Chileshe Moono said, “In the absence of a supplementary budget, it is difficult to ascertain the full fiscal gap; nonetheless, we are of the view it likely will reveal a widening of the fiscal deficit. This is on the back of the drought, which is expected widen the fiscal deficit as revenues recede and costs spike; while the US$388 million support from the IMF is considerable, we suspect that the authorities may require additional financing from the domestic market to mitigate its full impact. We therefore expect an uptick in yields at tomorrow’s auction this to reflect this reality. We could see a 100 bps to 150 bps increase across the curve.”
On the premise that the Bank of Zambia will be willing to accept higher premiums on bids, decent purchasing power could be seen in Fridays debt sale. This is consistent with the one year treasury bill yield scaling to 17.5% last Thursday.
The Kwacha Arbitrageur.