Business & Economy

Zambia: third Eurobond issued at a large premium

The Zambian government has successfully completed the sale of its third Eurobond – at a significant premium to earlier issuances. The $1.25 bn, 12-yr bond was priced at 9.375 percent, significantly higher than the 8.50 percent for the $1 bn 10-yr bond issued in April 2014.
The maiden issue in 2012 of $750 million had a coupon of 5.375 percent The prices of the first (2022) and second (2024) bonds have been falling since September 2014 underlining investor concerns over the economic outlook.
‘Interestingly, investors do not appear to be as concerned with the outlook in Ghana, which is considered Zambia’s closet peer in terms of economic fundamentals and sovereign rating. Its comparable bonds have been outperforming Zambia’s despite large fiscal and current account deficits,’ Ecobank said in a research note.
Despite the large sum raised, Zambia’s bond attracted significantly less interest compared to the 2022 and 2024 bonds. Timing helps explain why: African sovereigns that issued during 2012-14 were able to take advantage of the ultra-low interest rate environment in the US, eurozone and Japan, which helped attract many investors into Africa’s high nominal interest rate Eurobonds.
In addition, since mid-2014 onwards, Zambia’s economy has weakened, to the point where some investors have decided that the risk to the outlook outweighs the rewards from the high yield.
‘Timing is everything. Zambia is issuing after a flurry of recent policy statements from the Federal Reserve, the Bank of England, and elsewhere that their interest rates are likely to rise soon. The prospect of higher rates in the OECD diminishes the attractiveness of Africa’s high yields and also increases concerns over the perceived risk of investing in Africa’s Eurobonds compared to less risky sovereign [and OECD corporate] bonds,’ said Ecobank.
Another problem facing Zambia, largely of its own making, is the structural challenges that have increased recently. The fiscal deficit is expected to widen sharply this year to 10 percent of GDP, copper revenues are falling due to weaker global copper prices, and there has been an accumulation of external debt in a rising interest rate environment.
At 9.375 percent, the government faces an extra $9.8 milion in interest payments each year above the $12.5 million that is currently paid for the 2022 and 2024 bonds. The accumulated interest payments now required to be paid is $22.3 million, a significant amount that is approximately 0.7 percent of foreign exchange reserves, and 2.5 percent of the projected aid flow of $900 million in 2015.
The IMF recently advised in its July Article IV consultation report that caution should be used when considering borrowing at commercial rates. Concessional borrowing is the preferred option for the IMF. The government, however, appears to have overlooked this advice in order to plug its immediate financing gap.
‘In the short term, the Eurobond makes some sense but in the medium term and beyond, the extra strain that additional debt payments make raises concerns over the exchange rate, balance of payments and overall economic stability,’ Ecobank in its research note.

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