Zambia is set to tap the international bond market for a second time, possibly up to $1 billion this quarter, after confirmation that the sovereign has renewed its contract with Deutsche Bank and Barclays to act as joint bookrunners for the issue.
However, policymakers will be hard pressed to reach similar terms to the sovereign’s debut issue in 2012, say analysts, testing the sovereign’s price sensitivity.
“Now that Zambia has confirmed who the bookrunners will be, they will no doubt come to the market soon,” says Samir Gadio, emerging markets strategist at Standard Bank.
“But in the current climate, I would say that the best-case scenario for the bond would be yields of between 8.25% and 8.5%. I’m not sure if policymakers will be prepared to pay this much.”
Zambia’s initial 10-year bond was issued on September 13, 2012, priced at 5.625%. While the government originally planned to raise $500 million, high levels of investor interest led to an increase of $750 million.
Since the issue, yields have risen about 250 basis points, with the yield on Zambian bonds currently at 7.77% – lower to only Ghana, which is yielding 8.57% on bonds issued last year.
“Negative sentiment from Fitch’s downgrade to B from B+, combined with a weaker fiscal environment, will weigh on Zambia’s next issue,” says Carmen Altenkirch, director of sovereign ratings at Fitch in London.
“But perhaps more important for the price of the issue will be whether they are able to issue when the market is still benign. The risk is that as the year progresses and Fed tapering gathers pace, bond yields will rise further and faster.”
When Zambia issued its first dollar-denominated bond, low yields and high levels of liquidity characterized the market. In large part, investors ignored African credits’ fundamentals, eager to follow fund flows and grab a piece of the action.
However, as the economic climate changes, signalled by Fed tapering and a slow recovery in developed markets, investors are becoming a lot more interested in the underlying economic fundamentals of certain sovereigns.
Since the debut issue, Zambia’s fiscal position has deteriorated, becoming a cause for concern among investors.
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| Zambia minister of finance Alexander Chikwanda |
“Before 2013, Zambia had a long history of fiscal prudence, running deficits between 2% and 3% of GDP,” says Fitch’s Altenkirch. “The announcement that the [fiscal] deficit would rise to 8.5% of GDP in 2013 raised doubts about Zambia’s commitment [to this]. “But Monday’s announcement by the minister of finance [Alexander Chikwanda], that the deficit could come out lower than anticipated at 6.7% for 2013, is encouraging. The ultimate impact on Zambia’s economic prospects will really depend on how quickly Zambia can get the deficit down and re-assert their commitment to prudent fiscal policy.”
Standard Bank’s Gadio concludes: “A sudden improvement in fiscal policy could help Eurobond evaluations, but momentum in Zambia is down, so I don’t know how likely this is.”