The ‘Mu­tati’ Fi­nance Min­istry Reshuf­fle and IMF dis­missal of Zam­bia’s re­cent bor­row­ing plan ef­fect

• Credit spreads on Zam­bia’s Eurobonds widen 1% in three days

Zambian Business Times - - FRONT PAGE -

CREDIT SPREADS on Zam­bia’s dol­lar bonds widened by about 1% over the last three days fol­low­ing a se­ries of events rang­ing from a Fi­nance Min­istry reshuf­fle to IMF re­ject­ing Zam­bia’s most re­cent bor­row­ing plans. The South­ern Africa na­tion an­nounced Cab­i­net reshuf­fles in key min­istries that saw Honor­able Felix Mu­tati moved to Min­istry of Works and Sup­ply re­placed by for­mer Com­merce and Trade Min­is­ter Honor­able Mar­garet Mwanakatwe. Other changes in­clude for­mer Mines Min­is­ter Christo­pher Yaluma moved to Com­merce Min­istry re­placed by...........

CREDIT SPREADS on Zam­bia’s dol­lar bonds widened by about 1% over the last three days fol­low­ing a se­ries of events rang­ing from a Fi­nance Min­istry reshuf­fle to IMF re­ject­ing Zam­bia’s most re­cent bor­row­ing plans. The South­ern Africa na­tion an­nounced Cab­i­net reshuf­fles in key min­istries that saw Honor­able Felix Mu­tati moved to Min­istry of Works and Sup­ply re­placed by for­mer Com­merce and Trade Min­is­ter Honor­able Mar­garet Mwanakatwe. Other changes in­clude for­mer Mines Min­is­ter Christo­pher Yaluma moved to Com­merce Min­istry re­placed by trade union­ist and vet­eran miner Richard Musukwa.

On 16 Fe­bru­ary, news of the In­ter­na­tional Mone­tary Fund re­ject­ing Zam­bia’s bor­row­ing plans was priced into the mar­ket re­sult­ing in a fur­ther widen­ing of dol­lar debt spread across the three bonds run­ning namely – 2022, 2024 and 2027.

Zam­bia had hoped to have a $USD1.3bil­lion loan agree­ment with the IMF com­pleted early this year, Trea­sury Sec­re­tary Fred­son Yamba said in Novem­ber. The IMF's re­jec­tion puts those plans on hold.

It was the sec­ond time the IMF had re­jected a Zam­bian pro­posal. In Au­gust 2017, it also turned down bor­row­ing plans it said threat­ened debt sus­tain­abil­ity.

IMF staff then re­quested new bor­row­ing plans be­fore it would re­sume talks on a lend­ing pro­gramme, the IMF said from Wash­ing­ton in a writ­ten re­sponse to a press query.

"How­ever, the lat­est bor­row­ing plans pro­vided by the au­thor­i­ties con­tinue to com­pro­mise the coun­try's debt sus­tain­abil­ity and risk un­der­min­ing its macroe­co­nomic sta­bil­ity and, ul­ti­mately, liv­ing stan­dards of its peo­ple," the IMF said.

"Against this back­ground, any fu­ture pro­gramme dis­cus­sions can only take place once the Zam­bian au­thor­i­ties im­ple­ment cred­i­ble mea­sures that en­sure debt con­trac­tion is con­sis­tent with a key pro­gramme ob­jec­tive of sta­bi­liz­ing debt dy­nam­ics and put­ting them on a de­clin­ing trend in the medium term." "Against this back­ground, any fu­ture pro­gramme dis­cus­sions can only take place once the Zam­bian au­thor­i­ties im­ple­ment cred­i­ble mea­sures that en­sure debt con­trac­tion is con­sis­tent with a key pro­gramme ob­jec­tive of sta­bi­liz­ing debt dy­nam­ics and put­ting them on a de­clin­ing trend in the medium term."

Trea­sury of­fi­cials could not be reached for com­ment.

Zam­bia's to­tal pub­lic debt at the end of Au­gust 2017 stood at $12.45 bil­lion rep­re­sent­ing 47 per­cent of gross do­mes­tic prod­uct.

The IMF will con­tinue to en­gage with Zam­bia through reg­u­lar dis­cus­sions and tech­ni­cal as­sis­tance, the fund said.

Reuters car­ried on its web­site

New Fi­nance Min­is­ter Mar­garet Mwanakatwe takes the reins of an econ­omy that is re­bound­ing from its slow­est growth since 2001 as cop­per prices rise. Still, for­eign ex­change re­serves, at $2bil­lion, are at their low­est level since 2010, and would only cover 2.5 months of im­ports, ac­cord­ing to Ex­otix Cap­i­tal. Mu­tati had helped ar­rest grow­ing fis­cal deficits that emerged since the Pa­tri­otic Front took power in 2011.

Mu­tati’s re­moval is a “strong in­di­ca­tion that fis­cal pol­icy is go­ing to be­come even more in­con­sis­tent and un­con­trolled that it has been in re­cent years,” an­a­lysts at the Econ­o­mist In­tel­li­gence Unit said in a note. - Bloomberg car­ried on its web­site

Mar­ket Com­men­tary

Eurobonds also called dol­lar bonds are elas­tic (sen­si­tive) to mar­ket news by na­ture of their liq­uid­ity. What was ob­served for Zam­bian dol­lar de­nom­i­nated pa­per be­tween 14 to 16 Fe­bru­ary was a widen­ing in credit spreads be­tween 77bps (0.7%) and 94bps (0.94%) to 7.27% for the 2022, 7.8% for the 2024 and 8.26% for the 2027. Credit spreads mea­sure the credit qual­ity of a coun­ter­party and as such widen­ing means in­vestors are jit­tery and ner­vous about some mar­ket devel­op­ment. The mar­ket saw the IMF news on dis­missal of Zam­bia’s re­cent bor­row­ing plans caus­ing spreads to blow out be­tween 25 cents to 32 cents adding on to the pres­sure from the cab­i­net reshuf­fle – the pre­vi­ous day- that saw Felix Mu­tati re­placed by Mar­garet Mwanakatwe which then caused the widest blow out of be­tween 24 cents to 39 cents on 14 Fe­bru­ary. This con­tin­ued to weigh on the mar­ket on the 15 Fe­bru­ary widen­ing the Z spreads an ad­di­tional 19 cents to 21 cents. The to­tal sell­off in the last 3 days was be­tween 77cents to 94cents. A blow out or a widen­ing makes bonds ex­pen­sive and cheap price­wise. ( This tak­ing into ac­count the in­verse pro­por­tional re­la­tion­ship be­tween yield to ma­tu­rity ( YTM) and price of a dis­count in­stru­ment such as a bond or trea­sury bill).

African Eurobond pric­ing is driven by un­der­ly­ing 10yr US trea­sury ( bench­mark) and credit spreads that mea­sure a coun­try’s sov­er­eign risk pro­file which is in turn driven by po­lit­i­cal risk fac­tors, com­mod­ity price tra­jec­tory, credit risk rat­ing by Stan­dards and Poor’s, Fitch, Moody’s and gen­eral in­vestor per­cep­tion of the bor­row­ing coun­try. Zam­bia’s yields have nar­rowed sig­nif­i­cantly over the last 1.5 years due to a bullish cop­per tra­jec­tory that saw the red me­tal rally 36% stronger to $7,189/mt lev­els. Yields on av­er­age de­clined to 6-7% lev­els from highs of 13-14%. Zam­bia was among com­mod­ity de­pen­dent na­tions such as Nige­ria, An­gola, Ghana, Kenya, Gabon, Sene­gal and Egypt that ex­pe­ri­enced this bullish trend.

Yields have in the month of Fe­bru­ary widened a to­tal of 1.21% on av­er­age due to cop­per price volatil­ity as the red me­tal kept vi­brat­ing be­tween $6,845/mt and $7,189/mt.

As at 5.30pm on Fri­day 16 Fe­bru­ary yields on Zam­bia’s 2022 were priced at 7.27%, while those for the 2024 and 2027 were priced at 7.8% and 8.26% re­spec­tively.

“Zam­bia is­sued its cel­e­brated $750mil­lion (2022) at 5.25%, then is­sued the next $1.25bil­lion (2024) at 6.785% and the third is­sue of $1bil­lion (2027) was at 8.75%. Clearly the cur­rent yields on these bonds are far higher cur­rently that when the bonds were in their pri­maries ( first is­suance). This re­flects a de­te­ri­o­ra­tion in credit qual­ity of the coun­ter­party of­f­course off­set by the cop­per price which has been ex­cep­tional in the last 1year. Mar­kets have a sure way of com­mu­ni­cat­ing whether they are com­fort­able with ac­tions taken by bor­row­ing sov­er­eigns. A widen­ing in this case tells us that in­vestors are very ner­vous about the news of the IMF on the bor­row­ing plans sub­mit­ted by Zam­bia and the move of Felix Mu­tati in the mid­dle of pack­age ne­go­ti­a­tions. One per­cent (1%) on a dol­lar fa­cil­ity is huge. All eyes are on Zam­bia as this week the South­ern Africa na­tion is sell­ing ZMW1.65bil­lion in long dated bonds.” Busi­ness Times Lead An­a­lyst

For­mer Fi­nance Min­is­ter Honor­able Felix Mu­tati speaks to IMF Di­rec­tor for Africa Re­gion Dr Abebe Se­lasie (Mid­dle) and IMF Mis­sion Chief for Zam­bia Dr. Boileau Loko.

Credit Spreads on Zam­bia’s 2022, 2024 and 2027 ma­tur­ing Eurobonds ex­tracted from Bloomberg. The ZSpreads widened be­tween 77bps - 94bps be­tween the 12 to 16 Fe­bru­ary the big­gest rise be­ing the day Zam­bia reshuf­fled lead­er­ship in the Fi­nance Min­istry.

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