Financial marketsBondsZambia: Local Debt Attractive but Eurobonds are Stretched.

Kennnedy MuturiFebruary 1, 202354812 min

Following President Hakainde Hichilema’s (H.H.) election last month, Zambian assets have been on a rampage ever since. ZMW has gained 20 percent since mid-July, while ZAMBIN 812 04/14/2024 Eurobond has gained 19 percent, and its 5-year Treasury bond has gained 22% with the yield falling from 32 percent to 25%, (Tellimer, 2021)

According to a report by AERC Africa, the central bank ascribed the recent strength of the kwacha to increased copper prices and foreign portfolio inflows both before and following the election. As a result of higher mining sector royalties, the Bank of Zambia (BoZ) was able to sell US$690mn of foreign currency to the market in the year (2019) through July 23, compared to barely US$90mn in the same period the previous year, erasing the US$420mn FX demand backlog by the end of July.

Between the end of June and July 30 in the year 2019, the amount held by non-residents in government securities more than doubled to ZMW45bn which is about 25% of outstanding securities. As a result of a 5x oversubscription at the government bond auction held on August 27 amid a surge in non-resident inflows, the yield fell by approximately 8ppts.

Musokotwane has a Ph.D. in monetary economics from Konstanz University in Germany and served as finance minister from 2008-2011 in the aftermath of the global financial crisis, a period in which Zambia maintained broadly balanced budgets. He has also served as deputy central bank governor, where he oversaw the reintroduction of local currency bond auctions and has held positions at the IMF and World Bank. He will be seen as a relatively safe pair of hands by investors and has hit the ground running with the stated goal of stabilizing Zambia’s finances and securing an IMF program by this October.

It’s not only Musokotwane, either. Key appointments have been made, with recent official opening of the National Assembly:

  • of the Treasury Felix Nkulukusa was appointed in place of FredsonYamba. A graduate of Williams College in the United States, Nkulukusa has held positions at the Ministry of Finance and recently as the CEO of a Lusaka-based energy company.
  • Mines minister Paul Kabuswe has been chosen and charged with luring investment in the sector following years of unstable policymaking.
  • According to the Zambia Chamber of Mines, if an agreement is achieved on royalties, growth projects worth US$2 billion might begin next year.
  • Christopher Mvunga, the controversially chosen central bank governor, resigned this week. H.H. has appointed Francis Chipimo as acting governor and hopes to reestablish the BoZ’s perception of independence.
  • As part of an effort to counter the reputation of authoritarianism that evolved under Lungu, H.H. sacked all provincial police commissioners with immediate effect and selected Lemmy Kajoba as the new police inspector-general and Dennis Alibuzwi as the army commander.

An unprecedented number of statements have come from the incoming administration. Creditor companies in Zambia don’t need to be concerned about our current financial situation. A mutually beneficial and friendly solution will be found for our debt. As a result, we shall act with integrity and transparency. Zambia’s youngsters would tell you, “Bally will pay.” As well as:

  • H.H.: “We will be looking for support from the lenders; there’s no question about that…We are going to make sure that we do not discriminate against lenders. We do not cross -subsidize.”
  • H.H.: “Our checklist is longer than that of the IMF. So, the IMF will be very pleased to know that we’ll not be hiding behind them to say to Zambians, these are IMF conditionalities. These are our minimum requirements as a government to deliver on the economy.”
  • H.H.: “We have a new set of kids on the block in ourselves, who mean business, who bring credibility, who bring prudence to the table, who bring, if you like, prioritization in the way resources are utilized.”
  • Musokotwane: “Unless we do something to the budget, then the budget will be mainly for paying salaries and also servicing debt… The answer is to talk to the people we owe money to so that we can pay at a slower pace stretched over a longer period.”
  • Musokotwane: “Yes, it makes sense to get credit from the IMF because financing will come in cheaper, and we will be able to assure the creditors and investors who would like to invest in Zambia as the IMF will give them confidence.”
  • Musokotwane: “We are going to push production of copper by creating a good environment for investment to be made… You will not know what to do with the dollars that this country is receiving.”
  • Kabus: “We need to bring sanity in the mines. There’s been so much confusion. There have been so many different policies… We are going to move in with vigor and make sure that Zambia benefits from the mineral resource.”

As a result, investors have become more optimistic and believe that the restructuring would benefit them. There is also a notion that H.H. is wiping the slate clean ahead of negotiations with the IMF and bondholders. A new leaf has been turned for economic policymaking in Zambia due to the leadership changes.

However, the news hasn’t been all good thus far. H.H. told the BBC that the “hole is far worse than we expected,” and the debt situation had not been “fully disclosed” by the former government. He also said that the treasury was “literally empty,” with a “horrifying” amount of money stolen. (Zambia Daily Mail, 2021)

He stated that his government has now a desire for increased openness in the debt market. Now we’re starting to understand that the official debt numbers aren’t truly the total numbers. Some of the deals you’re dealing with were arranged outside of the conventional procedures and acquired without the consent of parliament. KCM’s nationalization, he added, will result in another US$1.5-2bn in liabilities on the government’s books.

Investors were given the following assurances by H.H. “Ideally, we’ll be able to present all of our numbers at the table. As a result, we wish to get down with debt stockholders courteously and reasonably to identify solutions that benefit all parties.” Due to a lack of transparency, restructuring negotiations will be more difficult, but the amount of relief sought from bondholders is unlikely to change significantly we witnessed this about Mozambique’s debt in the bond restructuring conditions presented during 2018-2019).

As a result of undisclosed pre-election spending, the budget could turn out to be even worse than expected. However, based on official data through May 2018, non-interest spending and subsidy payments are likely to have risen. It will be more difficult for H.H.’s fiscal reduction program if pre-election expenditure causes the deficit to exceed its target and, as we have pointed out, it is not clear that he is committed to reducing FISP subsidies.

Kennnedy Muturi

Ken is a Quantitative Trader with experience in investments, quantitative finance, financial modelling and algorithmic trading in Global Investable Markets (GIM). He enjoys using Bayesian Statistics, Time Series and Machine Learning in developing Robust consistent Alphas in Equities Market, FX, ETPs and Derivatives instruments. He enjoys deep dives in understanding High Frequency Trading infrastructures and improving how the African financial markets work. He holds a Bachelor's in Actuarial Science from Strathmore Institute of Mathematical Sciences : An Executive Program in Algorithmic Trading (EPAT) certificate in Algo Trading from QuantInsti : A current MSc student in Financial Engineering at World Quant University.

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