An 83% locally funded USD5billion ‘Kwacha Debt Market’

The Bank of Zambia – BOZ on 16 May at a Monetary Policy Committee announcement revealed that the size of the Kwacha debt market is ZMW50.2billion (an estimated USD5billion) of which 83% is funded locally by commercial banks and pension funds while the remaining 17% of Kwacha assets are held by offshore players in Africa’s second largest copper producer. The debt market has grown by 115.7% to ZMK50.9billion over the last two years which economists have attributed the rise in appetite to government borrowing patterns which ideally should reflect economic growth trajectory (see figure 1 and figure 2). This however not been the case because Zambia has found itself is an external debt trap quagmire as a result of aggressive fiscal policy not backed by commensurate revenue generation. (See figure 3)

Figure 1. The Kwacha Debt Market trajectory over the last 2 years. Data extracted from Bank of Zambia website.

The Kwacha debt market split comprises ZMW30.6billion in bonds and ZMW20.3billion treasury bills. See graph below for breakdown.

Figure 2. Growth of the Kwacha debt market data extracted from Bank of Zambia website.

Figure 3. Decline in economic growth trajectory from 2010 to 2017 with estimates for 2018-2019.

The USD5billion ‘Kwacha debt’ market comprises 83% domestic and 17% foreign player participation. The local player concentration includes the state pension fund and most commercial banks. This is arguably the causer of the crowding out effect of the domestic credit market due to the shape of the yield curve. So even when the statutory reserves were eased 1350bps to 5% from February 2017 commercial banks have their liquidity tied up in even more bills and bonds. It’s as though the SRR decrease was an accounting treatment to free cash into the system and have it absorbed by commercial banks through onward lending to the government. The Bank of Zambia has commenced a road show to market government securities a measure undertaken to fulfil the budget commitment to attain the 60%: 40% local to external debt mix in the quest to manage the cost risk trade off. The BOZ will visit every provincial center to sensitize citizens on government securities by capturing the retail segment of the debt market which has been fairly inactive.

Figure 4. Debt Market split between treasury bills and bonds.

Figure 5. Offshore versus Onshore participation in the Kwacha debt market.

Why commercial banks and pension funds are partly to blame for the current high interest rates

So the interest rates are high as evidenced by high credit and liquidity spreads of 1,436bps above the policy rate of 9.75%. It is the same pension funds that were highly liquid in 2015 -2016 financial years and deposited cash with commercial banks through aggressive bidding processes. Because of desperation in the liquidity crunch era smaller banks at the cusp of extinction had no choice but to bid high yet bore the cost of expensive deposits which they still grapple to flush out. Then again one cannot blame the state pension fund for calling the shots when the insurance industry has been inactive despite holding market liquidity in premiums collected from citizens. How then can the financial markets deepen when players like insurance shy away from market participation?

Commercial banks through a ‘cheeky bidding’ have caused an elevated yield curve which through a reverse cycle contributes to lending rates because most referencing for corporate lending such as loans or corporate debt is based on the yield curve. So then an elevated yield curve translates to higher reference rates.

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