The ‘Cop­per – Bal­dini’ ef­fect on Eurobonds….

• Cop­per flirted with near 1-month lows caus­ing a blow out in Zam­bia’s dol­lar bonds • IMF res­i­dent reps re­call to Wash­ing­ton added more pres­sure on de­fault spreads

Zambian Business Times - - FRONT PAGE -

SPRING has been a very tough and bear­ish month for Zam­bia along­side other emerg­ing mar­kets. Ide­ally we ex­pect to see bright flow­ers at the begin­ning of Au­gust...

SPRING has been a very tough and bear­ish month for Zam­bia along­side other emerg­ing mar­kets. Ide­ally we ex­pect to see bright flow­ers at the begin­ning of Au­gust but for the Zam­bia this wasn’t the case. Both dol­lar and kwacha as­sets have been at record lows as a con­se­quence of a num­ber of fac­tors rang­ing from global risk ap­petite to mar­ket spe­cific de­vel­op­ments caus­ing waned in­vestor sen­ti­ment.

Credit de­fault spreads (CDS) on dol­lar bonds for Zam­bia, Africa’s largest pro­ducer of re­fined cop­per, widened by be­tween 470-471bps in the spring month of Au­gust to date. Credit risk on bonds for ma­tu­rity 2024 widened the great­est by 504bps (to 1,288bps) as the 2022 bond spread widened 472bps (to 1,260bps) while the 2027 widened the least by 470bps (to 1,197bps). The cop­per pro­ducer is run­ning an ex­ter­nal debt stock of USD9.37 bil­lion (ac­cord­ing to MOF H1: 2018 Per­for­mance re­port) of which 32% to­talling USD3 bil­lion com­prises of three (3) Eurobonds trading on the in­ter­na­tional cap­i­tal mar­kets. Driv­ers of the lower bond val­u­a­tions in the pe­riod range from ran au­topsy of the risk- off emerg­ing mar­ket en­vi­ron­ment as a re­sult of a very strong dol­lar en­vi­ron­ment to the Al­fredo Bal­dini (IMF Res­i­dent Rep­re­sen­ta­tive) re­call to Wash­ing­ton ef­fects.

Credit de­fault spreads, also known as a credit de­fault swap spread or a credit spread (or some­times, sim­ply, the spread). In de­riv­a­tives, an amount, typ­i­cally spec­i­fied in ba­sis points, above LIBOR that a credit pro­tec­tion seller charges a credit pro­tec­tion buyer for credit pro­tec­tion in a credit de­riv­a­tive trans­ac­tion, usu­ally a credit de­fault swap (CDS). The spread is es­sen­tially a fee that rep­re­sents the price of sell­ing credit pro­tec­tion on a par­tic­u­lar reference en­tity. The higher the spread, the greater the credit risk of the reference en­tity.

Credit risk on dol­lar bonds has be­tween dou­bled and tripled (185% – 297%) from Fe­bru­ary 2018 lev­els when cop­per was at its peak. This pe­riod had bullish fun­da­men­tals rang­ing from a Fitch pos­i­tive out­look rat­ing on a B rat­ing for Zam­bia and Lon­don Metal Ex­change – LME record­ing cop­per above USD7,000/mt. Yields on the Zam­bian dol­lar as­sets have risen above 14% for all ma­tu­rity tenors: 2022 (15.15%), 2024 (15.33%) and 2027 (14.24%). This then ranks the cop­per pro­ducer’s dol­lar as­sets sec­ond worst af­ter Mozam­bique’s 2023 bonds pay­ing 17.145%.

See sum­mary ta­ble be­low of credit spread risk on Zam­bia’s Eurobond:

‘Risk-off ’ emerg­ing mar­kets

Vul­ner­a­bil­ity of EM’s is due to high de­pen­dence on com­modi­ties for ex­port rev­enues and as such dol­lar strength has made risky as­sets such as oil, cop­per and other in­dus­trial met­als. Dol­lar strength makes dol­lar de­nom­i­nated as­sets such as stocks and trea­suries very at­trac­tive and this causes as­set sell-offs in emerg­ing mar­ket as­sets such as dis­count in­stru­ments and as such in­vestors sell off to exit (EM’s) with in­tent to in­vest in dol­lar as­sets. With the trade wars that have loomed with global giants such as China with ridicu­lous tar­iffs de­signed to pro­tect the US econ­omy, com­modi­ties have shaved sig­nif­i­cant value in emerg­ing mar­ket cur­rency terms. Right about Au­gust 13 the dol­lar in­dex was at its peak at 96.7 (a 13 month high) which saw com­modi­ties such as cop­per flirt with close to 1-month lows just be­low USD6,000/mt at USD5,965/mt. Zam­bia’s Dutch dis­ease for cop­per makes the na­tion prone to ex­ter­nal shocks such as a plum­met in the red metal price and as such re­sults in credit risk con­cerns. Why would this be so? Cop­per is not only a barom­e­ter for global eco­nomic health but sig­nals Zam­bia and the DRC’s growth prospects (DRC and Zam­bia are Africa’s top cop­per hotspots). Even the rat­ing agen­cies look to cop­per pric­ing to roughly proxy Zam­bia’s growth prospects. So Don­ald Trump’s tweets on im­po­si­tion of tar­iffs on global trade part­ners that causes in­vestors to off­load risky as­sets that send metal prices to lows, in­di­rectly im­pacts na­tions like Zam­bia and other emerg­ing mar­kets.

IMF res­i­dent rep ‘Bal­dini’ ef­fect

The dol­lar bond mar­kets have priced – in (and still pric­ing -in) news around the re­call of the IMF res­i­dent rep­re­sen­ta­tive Pro­fes­sor Al­fredo Bal­dini on Au­gust 23 when Bloomberg re­ported the news which ev­ery trader and fund man­ager across the globe trading or man­ag­ing Zam­bian as­sets must have seen. This then added more pres­sure on de­fault risk spreads of the cop­per pro­ducer’s dol­lar bonds. The in­for­ma­tion asym­me­try still re­mains be­cause the IMF has not is­sued an of­fi­cial state­ment on the res­i­dent rep­re­sen­ta­tives re­call to Wash­ing­ton. How­ever, to al­lay fears of mar­ket ef­fects, the Min­is­ter of Fi­nance Mar­garet Mwankatwe is­sued a state­ment on the fi­nance min­istry’s web­site stat­ing that Zam­bia’s re­la­tion­ship with the IMF is healthy and in­tact and the res­i­dent of­fice in coun­try will re­main op­er­a­tional be­yond the tour of duty of Al­fredo Bal­dini who has been re­called by the IMF to Wash­ing­ton for re­de­ploy­ment.

The de­vel­op­ment comes at a time when Zam­bia is grap­pling with high risk of debt distress that the dol­lar bond mar­kets have al­ready ‘priced in’. What re­mains wor­ry­ing is that all these de­vel­op­ments have sent Zam­bia’s bond val­u­a­tion to its low­est ever. Zam­bia’s talks with the IMF ap­pear to have stalled with no pro­gram in the last two years that has seen the South­ern African na­tion an­nounce aus­ter­ity mea­sures to as­sist curb bal­loon­ing debt.

Kwacha volatil­ity

The kwacha has been on a volatile streak hav­ing started last week on a bear­ish note to K10.45/USD lev­els amidst dol­lar demand as most play­ers hedged their earn­ings in the world’s safest haven cur­rency the dol­lar. This is a be­havioural pat­tern very com­mon in Zam­bia es­pe­cially when un­cer­tainty and sen­ti­ment dampen. A few play­ers such as the mines courted the mar­kets to sell dol­lars to meet kwacha obli­ga­tions such as fund­ing salaries at month. How­ever, this was not enough to hedge pres­sure as the kwacha still closed 25 points north of K10 (K10.25/USD).

Former IMF Res­i­dent Rep­re­sen­ta­tive for Zam­bia – Pro­fes­sor. Al­fredo Bal­dini.

A com­par­i­son of African dol­lar as­sets show­ing Mozam­bique hav­ing the high­est credit de­fault risk at 1,453ba­sis points fol­lowed by Zam­bia at 1,198 ba­sis points.

A ta­ble show­ing credit spread risk on Zam­bia’s out­stand­ing dol­lar bonds for ma­tu­rity in 2022, 2024 and 2027.

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