An 83% lo­cally funded USD5bn ‘Kwacha Debt Mar­ket’…..

Zambian Business Times - - FRONT PAGE -

The Bank of Zam­bia – BOZ on 16 May at a Mon­e­tary Pol­icy Com­mit­tee an­nounce­ment re­vealed that the size of the Kwacha debt mar­ket is ZMW50.2bil­lion (an es­ti­mated USD5­bil­lion) of which 83% is funded lo­cally by com­mer­cial banks and pen­sion funds while the re­main­ing 17% of Kwacha as­sets are...

The Bank of Zam­bia – BOZ on 16 May at a Mon­e­tary Pol­icy Com­mit­tee an­nounce­ment re­vealed that the size of the Kwacha debt mar­ket is ZMW50.2bil­lion (an es­ti­mated USD5­bil­lion) of which 83% is funded lo­cally by com­mer­cial banks and pen­sion funds while the re­main­ing 17% of Kwacha as­sets are held by off­shore play­ers. in Africa’s sec­ond largest cop­per pro­ducer. The debt mar­ket has grown 115.7% to ZMK50.9bil­lion over the last two years which econ­o­mists have at­trib­uted the rise in ap­petite gov­ern­ment bor­row­ing pat­terns which ideally should re­flect eco­nomic growth tra­jec­tory (see fig­ure 1 and fig­ure 2). This how­ever not been the case be­cause Zam­bia has found it­self is an ex­ter­nal debt trap quag­mire as a re­sult of ag­gres­sive fis­cal pol­icy not backed by com­men­su­rate rev­enue sources. (See fig­ure 3) The Kwacha debt mar­ket split com­prises ZMW30.6bil­lion in bonds and ZMW20.3bil­lion trea­sury bills. See graph be­low for break­down.

The USD5­bil­lion ‘Kwacha debt’ mar­ket com­prises 83% do­mes­tic and 17% for­eign player par­tic­i­pa­tion. The lo­cal player con­cen­tra­tion in­cludes the state pen­sion fund and most com­mer­cial banks. This is ar­guably the causer of the crowd­ing out ef­fect of the do­mes­tic credit mar­ket due to the shape of the yield curve. So even when the statu­tory re­serves were eased 1350bps to 5% from Fe­bru­ary 2017 com­mer­cial banks have their liq­uid­ity tied up in even more bills and bonds. It’s as though the SRR de­crease was an ac­count­ing treat­ment to free cash into the sys­tem and have it ab­sorbed by com­mer­cial banks through on­ward lend­ing to the gov­ern­ment. The Bank of Zam­bia has com­menced a road show to mar­ket gov­ern­ment se­cu­ri­ties a mea­sure un­der­taken to ful­fil the bud­get com­mit­ment to at­tain the 60%: 40% lo­cal to ex­ter­nal debt mix in the quest to man­age the cost risk trade off. The BOZ will visit ev­ery provin­cial cen­ter to sen­si­tize cit­i­zens on gov­ern­ment se­cu­ri­ties by cap­tur­ing the re­tail seg­ment of the debt mar­ket which has been fairly in­ac­tive.

Why com­mer­cial banks and pen­sion funds are partly to blame for the cur­rent high in­ter­est rates

So the in­ter­est rates are high as ev­i­denced by high credit and liq­uid­ity spreads of 1,436bps above the pol­icy rate of 9.75%. It is the same pen­sion funds that were highly liq­uid in 2015 -2016 fi­nan­cial years and de­posited cash with com­mer­cial banks through ag­gres­sive bid­ding pro­cesses. Be­cause of des­per­a­tion in the liq­uid­ity crunch era smaller banks at the cusp of ex­tinc­tion had no choice but to bid high yet bore the cost of ex­pen­sive de­posits which they still grap­ple to flush out. Then again one can­not blame the state pen­sion fund for call­ing the shots when the in­sur­ance in­dus­try has been in­ac­tive de­spite hold­ing mar­ket liq­uid­ity in pre­mi­ums col­lected from cit­i­zens. How then can the fi­nan­cial mar­kets deepen when play­ers like in­sur­ance shy away from mar­ket par­tic­i­pa­tion?

Com­mer­cial banks through a ‘cheeky bid­ding’ have caused an el­e­vated yield curve which through a re­verse cy­cle con­trib­utes to lend­ing rates be­cause most ref­er­enc­ing for cor­po­rate lend­ing such as loans or cor­po­rate debt is based on the yield curve. So then an el­e­vated yield curve trans­lates to higher ref­er­ence rates.

Fig­ure 1. The Kwacha Debt Mar­ket tra­jec­tory over the last 2 years. Data ex­tracted from Bank of Zam­bia web­site.

Fig­ure 3. De­cline in eco­nomic growth tra­jec­tory from 2010 to 2017 with es­ti­mates for 2018-2019.

Fig­ure 2. Growth of the Kwacha debt mar­ket data ex­tracted from Bank of Zam­bia web­site.

Fig­ure 5. Off­shore ver­sus On­shore par­tic­i­pa­tion in the Kwacha debt mar­ket.

Fig­ure 4. Debt Mar­ket split be­tween trea­sury bills and bonds.

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