Bloomberg news reports that Zambia’s second Eurobond will prove costlier than its debut issue in 2012 after the budget deficit ballooned in the nation, which lost its spot as Africa’s biggest copper producer last year.
Spending reforms by President Michael Sata, whose 2011 election victory ended two decades of rule by a single party, were met by a Fitch Ratings downgrade last year, pushing it deeper into junk and making it the continent’s worst bond performance. Zambia’s dollar security due in September 2012 lost 9.7% in the past 12 months, compared with a 17% return in African sovereign bonds, according to JPMorgan Chase.
Mr Sata, 76, has focused on developing roads and railways in the $21bn economy and sought to harmonise civil-servant salaries that drove the budget deficit to 8.5% of gross domestic product (GDP) last year. Zambia, which mined an estimated 830,000 tonnes, was passed by the Democratic Republic of Congo as Africa’s top copper producer, says the US Geological Survey.
“The market’s perception of the government’s ability to manage public funds has worsened,” Yvette Babb, a fixed-income and currency strategist at Standard Bank in Johannesburg, said. “The credibility of Zambia’s fiscal policy has suffered as a result of the overrun in the budget deficit in 2013 as well as inconsistent statements about the magnitude.”
Zambia’s fiscal shortfall last year was wider than a 4.3% gap initially forecast by the Finance Ministry when it set budget targets in October 2012. A deficit of 6.6% is projected for this year.
The landlocked nation bordering eight countries said in October it may issue $1bn of Eurobonds, hiring Deutsche Bank and Barclays in January to lead the sale. Felix Nkulukusa, permanent secretary at the Finance Ministry, declined to comment on the plans.
Yields on Zambia’s $750m of debt sold in September 2012, which began trading at 5.16%, climbed to 7.97% by 11.52am in Lusaka. The Finance Ministry may have to pay 7.5% to 8.2%, depending on the amount, said Irmgard Erasmus, a fixed-income analyst with NKC Independent Economists in Paarl.
“We see considerable downside risk to Zambia’s domestic macroeconomic environment, which will likely result in a considerable premium at the upcoming issuance,” she said. “We consider the deterioration in the fiscal metrics” and dependence on a single commodity to be red flags, Ms Erasmus said.
Zambia depends on copper for about 70% of export earnings. Concern that growth is slowing in China weighed on the price of the metal, used in plumbing and electrical wiring. Copper for delivery in three months fell 17% over the past year to $6,505/tonne in London on Thursday.
Copper’s decline was among factors cited by the Bank of Zambia on March 7, when it said “panic” had gripped the country’s foreign-currency market. The kwacha weakened 1.3% to 6.01 per dollar, bringing this year’s drop to 7.7%. It’s the worst among 24 African currencies this year tracked by Bloomberg. The central bank raised its benchmark rate by 50 basis points to a record 10.25% on February 28.
Infrastructure investments and expansion in mining, including projects developed by Vancouver-based First Quantum Minerals, are set to boost growth to 6.5% of GDP this year, faster than the sub-Saharan African average of 6%, according to the International Monetary Fund’s October World Economic Outlook. Agricultural output may climb, allowing maize exports, vice-president Guy Scott said. The economy’s growth should encourage investors to buy Zambia’s bond, said Charles Laurie, head of Africa at UK-based risk analysis company Maplecroft.
[pullquote]The slump in the price of copper, which accounts for about 70 percent of Zambia’s export earnings, has seen the kwacha weaken 8.3 percent this year, the worst performer among the African currencies tracked by Bloomberg.[/pullquote]
“Plans for the issuance of a second Eurobond are sound,” he said. “Sound macroeconomic management, opportunities for nonmining investment and a young population signal growth opportunities.”
As Zambia heads to an election in 2016, Mr Sata, who ran three times before winning office, faces a tough fight to stay in power, said Clare Allenson, an analyst with Eurasia Group in Washington DC.
That poses extra risks to the state’s finances and may weigh on the next Eurobond issuance, she said.
Meanwhile,Zambia’s copper mines would be threatened should the price of the metal extend its decline to $5,000 a metric ton, according to the country’s mines minister, Christopher Yaluma.
Copper has dropped 13 percent this year to the lowest levels since 2010. The metal, which last traded below $5,000 a ton in July 2009, was down 1.4 percent to $6,415 as of 12:36 p.m. on the London Metals Exchange.
“When it starts getting to $5,000 and below,” that would threaten mines in Zambia, Yaluma told reporters on the sidelines of a mining conference in Lusaka, the southern African nation’s capital. “I don’t think this is going to carry on; it will still bounce back.”
The slump in the price of copper, which accounts for about 70 percent of Zambia’s export earnings, has seen the kwacha weaken 8.3 percent this year, the worst performer among the African currencies tracked by Bloomberg.
Yaluma expects Zambia to regain its position as Africa’s top producer of the metal, which it lost last year to the Democratic Republic of Congo, when new mining projects start production.
“When we see something like that it invigorates us to do much better,” Yaluma said. “It just tells Zambians to get your acts together.”
