With two yards of local currency liquidity into a Thursday’s 02 Jan. government security sale the Bank of Zambia was only able to tap K157million of the K253million purchasing power into the sale. This was an extension of the 27 Dec. dismal last bond sale of 2019.
The year 2019 had a better treasury bill auction performance at 86% subscription than bonds which headlined and anaemic 36% widening the funding gap to K11.89billion ($859million). The funding gap from the domestic market already stands at K792.3million ($54.6million) YTD given the difference between the assets on offer amount versus cash allocation.
Market analysts have been left guessing what the probable caused of the deep subscription haircut could be.
Perhaps the following:
Cautious Liquidity Management post CRR: The cash reserve requirement that effected on 23 December despite mopping K1.6billion left players cautious about cash management at beginning of the year. It is very likely that liquidity skew could be distributed more to banks that have very low appetite for government securities hence they shying away from the auction.
Govies not attractive enough: Kwacha treasury bill yields after tax are less attractive than other assets such as non deliverable forwards and as such there’s more appetite for NDFs and other higher yielding assets in real terms than government securities.
General Sovereign Risk Aversion: Players are generally risks averse at start of year seeking clarity through direction the fiscals will take into 2020. As such most players still believe the market has to reprice sovereign risks in the government security offerings to make them attractive and allow for proper asset valuation. The first auction of the year is usually a litmus year for asset repricing purposes.
Given the outlook for the red metal producer in 2020 currency and interest rate risks will persist with fiscal vulnerabilities and energy bottlenecks being the two key themes. Not all hope is lost given that with maturities coming up financial institutions will still reinvest cash at higher yielding assets which makes more economic sense than lending to the real sector lower rates. Given the credit risk appetite of the industry players will still have more appetite for shorter duration assets in 2020 than longer dated ones.
Key developments on the horizon include:
PMI release: Markit Economics will on the Monday release Zambia’s December private sector pulse which is forecast to be in contraction (<50).
MPC: Zambia’s first rate decision meetings to gauge monetary policy will take place mid February at which policy tightening is highly likely.
The Kwacha Arbitrageur