JOHANNESBURG Oct 21 (Reuters) – A Zambian bond auction on Friday is expected to be undersubscribed as a liquidity squeeze deters local investors and foreigners sit on the fence as they adjust to the new government.
Zambia’s first bond auction since the election victory of Michael Sata is likely to see modest demand as tight liquidity dampens local appetite and offshore investors await further signals on the direction of policy.
The Bank of Zambia will offer 300 billion kwacha ($60 million) of 2-, 3- and 5-year bonds today but analysts expect low participation from local banks as the central bank has been mopping up liquidity and overnight lending rates have risen sharply in the last few months.
At the last bond auction in September, which was oversubscribed, the yield on the 5-year bond declined while those on the 2- and 3-year instruments rose marginally.
A Treasury bill auction on Thursday was poorly subscribed, with the central bank receiving bids worth 103.6 billion kwacha out of 250 billion offered.
Yields on all tenors increased, with those on the 91- and 182-day bills reaching 9.27 percent and 11.98 percent, from 8.7 percent and 11.49 percent the previous week. The 273- and 364-day bills yielded 15 percent and 15.94 percent, from 14.53 percent and 15.14 percent.
“Short-term liquidity in the market has been drying up,” said Stanley Tamele, head of global markets at Standard Chartered Bank Zambia. “There’s about 250 billion kwacha as opposed to the 900 billion we used to see.”
Tamele said overnight lending rates had soared to 15 percent from around 4.5 percent two months ago.
“If you’re borrowing overnight at 15 percent and your 2-year bond is at 14.76 you start to ask yourself whether it’s worth it because overnight lending rates are going to remain high for a period of time,” he said.
Meanwhile, uncertainty over the new regime’s policies, as well as the unresolved Eurozone debt crisis, are also expected to keep foreigners away.
“There is a wait and see approach from foreign investors to see whether or not there are going to be radical changes to the policy framework,” said Yvette Babb, emerging markets strategist at Standard Bank.
Shortly after the election, Sata fired central bank governor Caleb Fudanga, raising fears about a shift in monetary policy.
The reversal of the $5.4 million purchase of Finance Bank to South Africa’s FirstRand and statements about the taxation of the mining sector had also unnerved investors, Babb said.
However, one trader said: “Foreign participation is largely down because of the risk-off scenario globally as opposed to what’s happening locally.”
He predicted rates would go up by 75 to 100 basis points, with half the size of the auction being taken up.
“I think it will be significantly undersubscribed,” he said. “The biggest players in there will be pension funds.”