Never mind the world’s worst currency and an economy hamstrung by plunging copper prices and electricity shortages. Nick Ndiritu, a portfolio manager at Cape Town-based Allan Gray Ltd., is buying more Zambian debt.
Zambian dollar bonds have lost 19 percent this year, the most out of more than 60 developing nations tracked by , as the kwacha lost almost half its value against the dollar. That contributed to a 10 percent loss for Allan Gray’s $149 million Africa ex-SA Bond Fund this year, double the 5 percent average loss of its peers, according to data compiled by Bloomberg. Zambian debt is the fund’s second-biggest holding after Nigeria.
“We’ve actually been increasing our exposure to Zambia as the market has become more negative,” adding to holdings of the nation’s Eurobonds due 2024, Ndiritu said by phone on Oct. 14. “We’ve taken a long-term view, and we think over the duration that we hold these bonds, they’re not going to be as marked down as they are today.”
Prices of copper, which accounts for 70 percent of Zambia’s exports, have dropped more than 20 percent in the past year, prompting companies such as Glencore Plc to consider shutting mines and fire thousands of workers. The slump in the industry will curb economic growth to a 17-year low of 3.4 percent in 2015, according to estimates from Barclays Plc, cutting tax revenue at a time when borrowing costs are rising and the kwacha’s slump is making dollar-interest payments more expensive. President Edgar Lungu called for a national day of prayer on Sunday to rescue the economy.
Zambians have been forced to endure power cuts of as long as 14 hours a day in the capital, Lusaka, as drought caused water levels to drop at Lake Kariba hydropower plants, which supply the nation with almost half of its electricity. Dry weather has also caused a 22 percent slump in production this year of corn, the staple food, boostinginflation.
That’s putting off many investors. The yield on the $1 billion of 2024 securities has climbed 338 basis points since the beginning of June, reaching a record 12.7 percent on Oct. 1. The rate on $1.25 billion of Eurobonds due 2027 has soared 237 basis points to 11.73 percent since it was sold in July.
“Investors will certainly be hesitant to put any amount of money into the country now; over the longer term maybe, but this year especially it’s going to be very, very difficult,”John Ashbourne, Africa economist at Capital Economics, said by phone from London on Oct. 16. “Yields are already really high, and it’s difficult to see why they would go any lower any time soon. It’ll probably get worse before it gets better.”
Zambian local- and foreign-currency debt made up 15 percent of Allan Gray’s Africa Bond Fund at the end of September. Nigerian debt accounts for 29 percent of the portfolio, even after a 20 percent slump in the nation’s currency over the past 12 months.
“We’re increasingly buying into these currencies where we’re seeing weakness,” Ndiritu said. “Two or three years from now, will Zambia still be facing these weather-related challenges and the challenges that that has had on the hydropower? We can’t foresee that being the case.”