Zambia is planning its largest sale of debt as the copper-rich country seeks to plug a yawning gap in government finances.
The southern African nation is planning to raise over $1bn this week
and is expected to pay a higher rate than it has for previous issues as
investors adopt a more cautious approach to buying emerging and frontier
market debt.
One investor who attended a meeting with the country’s representatives, including deputy minister of finance Christopher Mvunga, said the new bond would need to yield around 9 per cent to gain significant interest from fixed income investors.
When Zambia made its debut on global debt markets the country was able to borrow $750m over 10 years at a borrowing rate of 5.6 per cent. The second sale of debt two years later came at a higher price as investor interest in emerging markets cooled and cost the country 8.6 per cent to borrow $1bn.
Zambia, which is Africa’s second largest copper producer, has boasted some of the continent’s fastest economic growth rates during the last decade. But it has struggled as the price of copper, which accounts for two-thirds of exports, has slumped.
Commodity price weakness has weighed on the country’s economy, resulting in the currency, the kwacha, depreciating to record lows against the US dollar. Reflecting this, prices have fallen for Zambia’s benchmark 2024 bond, pushing the yield up 2 percentage points over the past twelve months to 8.65 per cent.
In light of the economic deterioration, rating agency Standard & Poor’s has slashed its long-term rating for the country from B+ to B in July, citing the increasingly strained fiscal situation and constraints imposed by next year’s election.
Since 2011, Zambia has been led by a populist government that significantly hiked public sector wages and has struggled to balance the books while the death of President Michael Sata in 2014 has raised political uncertainty. That triggered a presidential by -election earlier this year, while Zambians will vote again in general elections in 2016.
Nicholas Samara, debt capital markets banker at Citigroup, said bond investors were still bullish on Africa’s growth story, but added that Zambia was likely to have to pay a higher yield on the new bond because of the government’s fiscal challenges
“Investors appreciate Africa’s resiliency compared to other emerging markets — yields are still attractive and there’s still a growth story,” he said. “With Zambia’s case they are paying a price for the current (economic) situation they are at. This time around they will probably be on par with the widest yields in sub-Saharan Africa.”
Frontier markets are not expected to match last year’s record bond issuance, although sales from Ivory Coast and Croatia earlier this year met with strong demand and Ghana has announced plans to issue $1.5bn later this year.
“This is a buyer’s market for investors,” said Kevin Daly, investment manager at Aberdeen Asset Management. “That’s true in Zambia, across sub-Saharan Africa and in frontier markets in general.”
One investor who attended a meeting with the country’s representatives, including deputy minister of finance Christopher Mvunga, said the new bond would need to yield around 9 per cent to gain significant interest from fixed income investors.
When Zambia made its debut on global debt markets the country was able to borrow $750m over 10 years at a borrowing rate of 5.6 per cent. The second sale of debt two years later came at a higher price as investor interest in emerging markets cooled and cost the country 8.6 per cent to borrow $1bn.
Zambia, which is Africa’s second largest copper producer, has boasted some of the continent’s fastest economic growth rates during the last decade. But it has struggled as the price of copper, which accounts for two-thirds of exports, has slumped.
Commodity price weakness has weighed on the country’s economy, resulting in the currency, the kwacha, depreciating to record lows against the US dollar. Reflecting this, prices have fallen for Zambia’s benchmark 2024 bond, pushing the yield up 2 percentage points over the past twelve months to 8.65 per cent.
In light of the economic deterioration, rating agency Standard & Poor’s has slashed its long-term rating for the country from B+ to B in July, citing the increasingly strained fiscal situation and constraints imposed by next year’s election.
Since 2011, Zambia has been led by a populist government that significantly hiked public sector wages and has struggled to balance the books while the death of President Michael Sata in 2014 has raised political uncertainty. That triggered a presidential by -election earlier this year, while Zambians will vote again in general elections in 2016.
Nicholas Samara, debt capital markets banker at Citigroup, said bond investors were still bullish on Africa’s growth story, but added that Zambia was likely to have to pay a higher yield on the new bond because of the government’s fiscal challenges
“Investors appreciate Africa’s resiliency compared to other emerging markets — yields are still attractive and there’s still a growth story,” he said. “With Zambia’s case they are paying a price for the current (economic) situation they are at. This time around they will probably be on par with the widest yields in sub-Saharan Africa.”
Frontier markets are not expected to match last year’s record bond issuance, although sales from Ivory Coast and Croatia earlier this year met with strong demand and Ghana has announced plans to issue $1.5bn later this year.
“This is a buyer’s market for investors,” said Kevin Daly, investment manager at Aberdeen Asset Management. “That’s true in Zambia, across sub-Saharan Africa and in frontier markets in general.”
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