Zambia on Kwacha Damage Control Before Bond Sale: Africa Credit

Investors are awaiting evidence that Zambia’s efforts to shore up its currency will succeed as the government starts marketing a Eurobond, sub-Saharan Africa’s first sovereign international debt sale this year.

The kwacha, which slid to a record 6.44 per dollar on March 19, has extended its losses by 4.2 percent since Zambian policy makers scrapped laws to ease dollar shortages and took steps to reduce liquidity in the banking system. The kwacha slid 13 percent against the dollar this year, the worst performer of 24 African currencies monitored by Bloomberg.

The central bank, led by Governor Michael Gondwe, meets to decide on interest rates tomorrow after boosting the benchmark to a record 10.25 percent in February to support the currency and tame inflation, which accelerated for the fifth straight month in March. The nation, which sold Eurobonds in September 2012 with yields reaching 5.16 percent that month, may pay as much as 9 percent to sell debt now amid lower copper prices and a fiscal deficit, said Chris Becker, a market strategist at ETM Analytics.

“They’re going to be trying to market the bonds on the back foot,” he said by phone from Johannesburg yesterday. “It’s a risky one. They’re going to pay up.”

Yields on Zambia’s dollar securities, which rose to a record 8.33 percent on March 20, fell four basis points to 7.84 percent today. The notes lost 3.4 percent in 2014, the continent’s worst-performing dollar debt afterGhana, according to Bank of America Merrill Lynch indexes.

Bond Roadshow

The landlocked nation, which borders eight countries and relies on copper for about 70 percent of its export earnings, said in October it may issue as much as $1 billion of Eurobonds, hiring Deutsche Bank AG and Barclays Plc in January to lead the sale. The issuance will be the first since the U.S. Federal Reserve reduced its bond-purchase program. Ghana, which planned to sell its third Eurobond in April, delayed the program because of rising interest rates.

Zambia’s planned sale comes after the last two Treasury bill auctions failed, with the central bank raising a combined 186 million kwacha ($31 million) of the 1.2 billion kwacha on offer. It also follows a credit affirmation by Fitch Ratings on March 21, which kept the nation’s debt at B, five levels below investment grade, after cutting it one level last year.

Officials start in Los Angeles today before ending their roadshow in London on April 3 and 4, according to a person with knowledge of the offering who asked not to be identified because they were not authorized to speak publicly.

Second Sale

Central bank spokesman Kanguya Mayondi referred questions to Finance Ministry spokesman Chileshe Kandeta, who didn’t immediately reply to an e-mail. Permanent Secretary Felix Nkulukusa also didn’t immediately return e-mailed requests for comment.

Zambia’s second dollar-debt sale probably won’t be as successful as its first, which attracted bids of about $12 billion for the $500 million it initially offered, according to Sashi Kumi, a credit and fixed-income trader with Nedbank Capital in London. The country raised $750 million amid the strong demand.

“I don’t envision investor appetite will be as strong as last time round,” Kumi said in reply to e-mailed questions yesterday. “I think that they would have to bring this issue at around the 8.5 percent level to attract investor interest.”

On Hold

The central bank will keep rates on hold during the first half of this year after February’s 50 basis-point increase, which was an “aggressive move,” Celeste Fauconnier, an Africa analyst at Johannesburg-based Rand Merchant Bank, said by phone yesterday. Zambia may have to offer a yield of as much as 9 percent for the bond, Fauconnier and colleague Nema Ramkhelawan-Bhana said.

The kwacha slid 2.6 percent to 6.3950 per dollar at 1:44 p.m. in Lusaka, after dropping the same amount yesterday. The currency lost 0.7 percent this year through March 26, after adjusting for volatility, the most among African currencies, according to BLOOMBERG RISKLESS RETURN RANKING.

The kwacha may eventually strengthen back to 6 per dollar, supported by inflows, particularly into the nation’s copper industry, Ramkhelawan-Bhana said.

The central bank cannot afford to use dwindling foreign-currency reserves to defend the kwacha, Trevor Simumba, managing director at Sub-Saharan Consulting Group Zambia, said by phone March 19.

‘Leaking Roof’

“It’s like fixing a leaking roof with a small cup,” he said. “The Bank of Zambia, to be honest, doesn’t have the money to plug this hole.”

President Michael Sata, 76, has focused on developing roads and railways in the $21 billion economy, which combined with pay increases for civil servants and fuel and corn subsidies swelled the budget deficitto a forecast 8.5 percent of gross domestic product last year. While Sata implemented a two-year wage freeze for state employees in October and has removed corn aid, finances are still under pressure from an 11 percent drop in copper this year, with prices reaching a four-year low on March 13.

“We are circumspect of the central bank’s ability to achieve exchange rate and price stability while fiscal policy is decidedly expansionary,” Irmgard Erasmus, a fixed-income analyst at Paarl, South Africa-based NKC Independent Economists, said in an e-mailed reply to questions yesterday. Short-term measures will have a limited effect and the “government needs to address the large recurrent expenditures” in its budget, she said.


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