Offshore investors hold 30% of Zambian bonds…

Offshore or non-resident investors holdings of government bonds has continued to rise and has reached almost 30% by the end of March, the first quarter - Q1 of 2018. This was confirmed by Bank of Zambia to the Zambian Business Times - ZBT. Of the total outstanding of government bonds of about K30.6billion (about US$3.1billion), offshore investors had bought off K8.5bn (US$850mn) worth of bonds signifying good source of forex inflows which if well managed can be used as an extra monetary tool for the local unit, the Kwacha stability management.

Because proceeds of the bond sales are Kwacha denominated rather than foreign currency, there’s very little to zero exchange rate risk and this is a very key aspect in managing the cost risk trade-off when the Ministry of Finance in conjunction with the central bank decide budgetary financing strategy. Another major advantage of issuing local as opposed to foreign currency ‘dubbed eurobonds’ denominated paper is that the bonds tenors ( Term to maturity defined as the duration of time it will take for the assets to mature) can be matched against the intended infrastructure projects implementation timelines. The fixed nature of yields on Zambian bonds gives certainty as to the return on investment as opposed to a floating interest rate environment.

The Bank of Zambia has gone all out to institute measures that will deepen local markets to make the secondary market more active. This was established at a launch of a road show on sensitization of government securities in Lusaka. The BOZ said it has almost finalised establishment of primary dealership initiatives and will also commence research on whether players have appetite for lengthened tenors such as 20yr or 30yr bonds.

Partnerships with capital market players such as the Lusaka Securities Exchange - LSE are key especially for the development of enabling mechanisms for debt listing of the government and other corporate paper. The treasury will also have to do its part through the Securities and Exchange Commission - SEC to develop the regulation to support an active secondary market.

The treasury contribution is not exempt in contracting primary market dealers and put in place mechanisms to provide ready buyers for bonds in the secondary market. We already have expertise by Zambians already exposed to these operations plus support from within the Africa region in South Africa, Kenya that can be employed to fully leverage the local bond market development.

The beauty of developing a local bond market is that not-only will the central government benefit from reduced interest rates, but also benefits by raising funds that carry limited or no interest rate with little exposure to foreign exchange risk. The raising of municipal bonds or government agencies bonds to develop long term infrastructure such as housing, water reticulation systems and many other needs will stand a better chance, though offs course governance work needs to be done to ensure these municipalities start producing audited financial statements which has been a challenge with SOEs as cited by Auditor General’s Report.

The Lusaka Securities Exchange should also be jolted to life as the necessary legislation has now been put in place. The securities markets have for a long time been depressed and requires an adrenaline boost if the financial system is properly structured and works for the local businesses and individuals with measured support from offshore players for more complex and corroborative transactions.

“Zambian bonds have for a while been attractively priced with yields between 16% - 20% given the levels of single digit inflation making real yields positive. Zambian bonds also offer zero withholding tax on the discount rate making them one of the most attractive in Africa. The rise in offshore holding is a reflection of the state of the global economy when the US and Europe were in recession and a global sell off pointed investors to safer haven assets in Africa. However, this trend could reverse with the rising yield rates on US treasuries to record highs making investment in government securities more attractive.” Business Times Lead Analyst