Off­shore in­vestors hold 30% of Zam­bian bonds…

Zambian Business Times - - FRONT PAGE -

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

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