Zambia, which issued its first international debt 13 months ago, is considering the sale of a record $1bn eurobond to plug a budget deficit that contributed to a credit downgrade.
Africa’s biggest copper producer will try to contain some spending to reduce its fiscal shortfall to below the forecast of 8.5% of gross domestic product (GDP) for this year, Treasury Secretary Fredson Yamba said on Tuesday.
The government raised its estimate for the gap from 4.3% this month and is finalising as much as $250m in syndicated loans as funding needs are pushed up by spending on wages and subsidies.
Yields on Zambia’s $750m of bonds sold have climbed 159 basis points since being issued in September last year, compared with an average 123 basis-point increase for dollar-denominated African debt tracked by JPMorgan Chase & Company. On Monday, Fitch Ratings lowered Zambia one step to B, five levels below investment grade.
Standard & Poor’s downgraded its outlook to negative on Friday, while retaining its B+ rating.
The sale of a second eurobond “is one of the avenues available”, Mr Yamba said. “We are looking at various options. We have to go out there and see which is the cheapest source.”
While Zambia would be able to sell a $1bn eurobond, it will be more expensive than its debut securities, ETM Analytics market strategist Chris Becker said.
A sale would follow record issuances by African countries, including debut bonds from Rwanda and sales by Ghana, South Africa and Nigeria, and Tanzania, Kenya and Senegal planning to tap global markets.
“At the moment things are looking quite good and there’s a rush of issuances coming through,” Mr Becker said.
“It’s sort of a sweet spot for African eurobond issuances.”
Fiscal stimulus from the US Federal Reserve would probably continue until next year, providing a window for new bond sales from African countries, he said. Zambia’s eurobonds may underperform others from the continent because of its aggressive issuance, while the Fitch downgrade would also push yields higher, Mr Becker said.
Zambia’s kwacha weakened 1% to 5.45 per dollar by mid-afternoon in Lusaka, the worst intraday level since August 13. Yields on the eurobonds due in September 2022 rose three basis points to 6.75%, the highest in a week.
The government, which is one of the biggest employers in Zambia, plans a two-year pay freeze on government workers and a halt to hiring, after increasing salaries by as much as 50% last month. The public-wage bill will account for 53% of government revenue next year.
“Spending will over-run again in 2014, reflecting the cost of the wage increase and higher debt service costs,” Fitch analyst Carmen Altenkirch said in Monday’s report. “Wider deficits will place upward pressure on key debt ratios.”
The government plans to raise 7-billion kwacha ($1bn) in foreign financing, including 5.5-billion kwacha in programme loans, to fund 16.4% of the 2014 budget, Finance Minister Alexander Chikwanda said in his October 11 budget speech.