Bank of Zambia Increases Bond Auction Size in 2018 as Government Borrowing Appetite Swells

BANK OF ZAMBIA on 18 December notified the markets that it would be increasing its auction size on bond offerings by 65% to ZMW1.65billion. This signals an increase sale size reflects a rise in government borrowing appetite. The last bond sale of 2017 saw ZMW2.1billion appetite in aggressive bids of which ZMW1.27billion was absorbed with the 3yr, 5yr and 10yr tenors accounting for over 82% of the offering. With fading hopes on an IMF USD1.3billion package the governments only source of finance asides taxation will the domestic money markets through treasury bill and bond sales.’

The implications of this increase are as follows:

• Government borrowing needs to fund its activities has risen sharply and that we can expect more overcrowding of the domestic money markets at the expense of SME borrowing;

• Yields on the government bonds will be pressured to rise higher to make it attractive for players to subscribe

• The market could be headed towards a repeat of the ‘2015 Zambezi liquidity crunch’ which spiralled in interest rate hikes as liquidity will be mopped from the system; Clearly we see that the time copper was at $4,331/ton credit spreads on the 2027 and 2022 were in the range of 1,241bps or 12.4% above US treasury while at $7,188/ton (now) the spreads are 351-453bps or 3.5% -4.53% which is roughly an 8%-9% appreciation on Eurobond pricing.