- Credit spreads on Zambia’s Eurobonds widen 1% in three days
CREDIT SPREADS on Zambia’s dollar bonds widened by about 1% over the last three days following a series of events ranging from a Finance Ministry reshuffle to IMF rejecting Zambia’s most recent borrowing plans. The Southern Africa nation announced Cabinet reshuffles in key ministries that saw Honorable Felix Mutati moved to Ministry of Works and Supply replaced by former Commerce and Trade Minister Honorable Margaret Mwanakatwe. Other changes include former Mines Minister Christopher Yaluma moved to Commerce Ministry replaced by trade unionist and veteran miner Richard Musukwa.
On 16 February, news of the International Monetary Fund rejecting Zambia’s borrowing plans was priced into the market resulting in a further widening of dollar debt spread across the three bonds running namely – 2022, 2024 and 2027.
Zambia had hoped to have a $USD1.3billion loan agreement with the IMF completed early this year, Treasury Secretary Fredson Yamba said in November. The IMF’s rejection puts those plans on hold.
It was the second time the IMF had rejected a Zambian proposal. In August 2017, it also turned down borrowing plans it said threatened debt sustainability.
IMF staff then requested new borrowing plans before it would resume talks on a lending programme, the IMF said from Washington in a written response to a press query.
“However, the latest borrowing plans provided by the authorities continue to compromise the country’s debt sustainability and risk undermining its macroeconomic stability and, ultimately, living standards of its people,” the IMF said.
“Against this background, any future programme discussions can only take place once the Zambian authorities implement credible measures that ensure debt contraction is consistent with a key programme objective of stabilizing debt dynamics and putting them on a declining trend in the medium term.”
Treasury officials could not be reached for comment.
Zambia’s total public debt at the end of August 2017 stood at $12.45 billion representing 47 percent of gross domestic product.
The IMF will continue to engage with Zambia through regular discussions and technical assistance, the fund said. Reuters carried on its website
New Finance Minister Margaret Mwanakatwe takes the reins of an economy that is rebounding from its slowest growth since 2001 as copper prices rise. Still, foreign exchange reserves, at $2billion, are at their lowest level since 2010, and would only cover 2.5 months of imports, according to Exotix Capital. Mutati had helped arrest growing fiscal deficits that emerged since the Patriotic Front took power in 2011.
Mutati’s removal is a “strong indication that fiscal policy is going to become even more inconsistent and uncontrolled that it has been in recent years,” analysts at the Economist Intelligence Unit said in a note. Bloomberg carried on its website
Eurobonds also called dollar bonds are elastic (sensitive) to market news by nature of their liquidity. What was observed for Zambian dollar denominated paper between 14 to 16 February was a widening in credit spreads between 77bps (0.7%) and 94bps (0.94%) to 7.27% for the 2022, 7.8% for the 2024 and 8.26% for the 2027. Credit spreads measure the credit quality of a counterparty and as such widening means investors are jittery and nervous about some market development. The market saw the IMF news on dismissal of Zambia’s recent borrowing plans causing spreads to blow out between 25 cents to 32 cents adding on to the pressure from the cabinet reshuffle – the previous day- that saw Felix Mutati replaced by Margaret Mwanakatwe which then caused the widest blow out of between 24 cents to 39 cents on 14 February. This continued to weigh on the market on the 15 February widening the Z spreads an additional 19 cents to 21 cents. The total selloff in the last 3 days was between 77cents to 94cents. A blow out or a widening makes bonds expensive and cheap pricewise. (This taking into account the inverse proportional relationship between yield to maturity (YTM) and price of a discount instrument such as a bond or treasury bill).
“Zambia issued its celebrated $750million (2022) at 5.25%, then issued the next $1.25billion (2024) at 6.785% and the third issue of $1billion (2027) was at 8.75%. Clearly the current yields on these bonds are far higher currently that when the bonds were in their primaries (first issuance). This reflects a deterioration in credit quality of the counterparty offcourse offset by the copper price which has been exceptional in the last 1year. Markets have a sure way of communicating whether they are comfortable with actions taken by borrowing sovereigns. A widening in this case tells us that investors are very nervous about the news of the IMF on the borrowing plans submitted by Zambia and the move of Felix Mutati in the middle of package negotiations. One percent (1%) on a dollar facility is huge. All eyes are on Zambia as this week the Southern Africa nation is selling ZMW1.65billion in long dated bonds.”
Business Times Lead Analyst
African Eurobond pricing is driven by underlying 10yr US treasury (benchmark) and credit spreads that measure a country’s sovereign risk profile which is in turn driven by political risk factors, commodity price trajectory, credit risk rating by Standards and Poor’s, Fitch, Moody’s and general investor perception of the borrowing country. Zambia’s yields have narrowed significantly over the last 1.5 years due to a bullish copper trajectory that saw the red metal rally 36% stronger to $7,189/mt levels. Yields on average declined to 6-7% levels from highs of 13-14%. Zambia was among commodity dependent nations such as Nigeria, Angola, Ghana, Kenya, Gabon, Senegal and Egypt that experienced this bullish trend.
Yields have in the month of February widened a total of 1.21% on average due to copper price volatility as the red metal kept vibrating between $6,845/mt and $7,189/mt.
As at 5.30pm on Friday 16 February yields on Zambia’s 2022 were priced at 7.27%, while those for the 2024 and 2027 were priced at 7.8% and 8.26% respectively.
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