THE BANK OF ZAMBIA sold ZMW2.1billion in bonds on 23 February in an auction which was heavily oversubscribed. On offer was ZMW1.65billion yet bids totaled ZMW3.1billion of which ZMW2.1billion accounting for 67% of market appetite was satisfied. This was the first bond offering of the year 2018 with a 65% increase in size to ZM1.65billion. This bond auction attracted immense appetite for 10yr paper at ZMW1.22billion four times (4x) oversubscription compared to the ZMW300million on offer of which 59% was satisfied. Other tenors that attracted appetite were the 5yr and 15yr that saw ZMW616million (vs ZMW500million on offer) and ZMW467million (vs. ZMW300million on offer) in bids. Yields were infinitesimally changed with 10bps and 52bps decline in 2yr to 16.4% and 7yr to 18.98%. Bid cover ratio for the bond sale was 1.94. See below breakdown of the bond offering:
Zambia’s Central Bank earlier in the week lowered its benchmark lending rate 50bps to 9.75% – a 575bps cumulative rate cut from February 2017 – and further eased the statutory reserve ratio 300bps to 5% from 8%. This is a move that is expected to force lending rates down which have been cited as being exorbitantly high contributing to the increased stress in the non-performing loan industry portfolio at 12.7% in breach of the BOZ prudential limit of 10%. The markets are flush cash with players in search of yield especially after a 300bps SRR cut. It is not surprising that yields didn’t edge any higher after the easing monetary policy stance by the BOZ at a time when inflation is 6.1% making real yields very positive at the current bond yields. Our analysts forecast secondary market trading as ZMW1billion in aggressive bids were not satisfied. Some players had cheeky bids (higher than usual) after having priced- in ‘100bps -150bps’ above the old primary curve following news around IMF dismissal of Zambia’s borrowing plans.
However with Average Lending Rate – ALR spread over the Monetary Policy Rate – MPR widening, the excess liquidity from the SRR easing will likely be housed in government securities in the interim at current yields causing crowding out effect. in the offshore market, Zambian dollar bonds narrowed an average of 50bps in the week after the new Finance Minister Honorable Margaret Mwanakatwe reinforced commitment around Zambia’s fiscal path and said that she will continue with IMF engagement. Zambia’s Secretary to the Treasury Fredson Yamba also issued a statement reassuring investors that the Southern African nation was making plans settle its obligations – the 2022 bond – as they fall due.
As at 5.30Pm in Lusaka 5yr, 7yr and 10yr bonds were priced at 17.9%, 18.988% and 20% respectivley.
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