The central bank in Africa’s red metal producer, Zambia, has to date issued a total of K6.8bln worth of long dated Kwacha fixed income paper to absorb the effects of disease pandemic. These bonds were named COVID bonds as part of an K8bln stimulus package to absorb obligations to retirees, suppliers and contractors.
In the first tranche, the Bank of Zambia sold K5.2bln through a bond buy-back program in the short end which was swapped with long dated bonds in the 10 and 15 year tenors that saw participation from pension funds. This was part of a bond buy -back, bond consolidation and maturity profile restructuring. The central bank has since issued K1.6bln worth of these bonds at market rate cumulating total issuances to K6.8bln leaving a K1.2bln balance to raise the full K8bln stimulus package target. The outside primary market issuances have strictly been private placements.
Central bank balance sheet expansion. The central bank has been expanding its balance sheet which supports injection of fresh cash into the system to support fiscal expansionary spend which is critical for increased economic activity. In the developed world this is called quantitative easing, a very customary practice in crisis times for financial stability purposes. Disease pandemic effects have eroded growth from the copper producer whose estimated forecast for 2020 is -0.8% (World Bank) and -4.2% (Ministry of Finance) as per ministerial statement dated 14 July 2020. Total issuance of K8bln will allow for dismantling of 30.5% of domestic arrears which represent liquidity that the real sector of the economy has been deprived of.
Increased offshore appetite. Zambia’s strides to restore fiscal fitness through engagement of Lazard Freres and commencement of talks with the Washington based lender IMF for a bail out package has beamed a ray of improved sentiment making its government securities attractive. With flush cash markets from various stimulus interventions from global central banks, offshore players will seek housing in riskier assets including emerging and frontier market bonds. Offshore appetite in Zambian assets has seen improvement in the last bond primaries and treasury bill subscriptions generally.
The Kwacha Arbitrageur