Zambia $1 Billion Bonds No Threat to Finances as Yields Jump

Zambia, Africa’s biggest copper-producing nation, has room to borrow another $1 billion on international markets while keeping debt levels in check, a Finance Ministry official said.

Zambia plans to follow last year’s sale of $750 million of overseas securities with a $500 million to $1 billion offering in 2013 to help finance infrastructure projects, Deputy Finance Minister Miles Sampa said in a telephone interview from the capital, Lusaka. The country’s debt to gross domestic product will remain under 40 percent, he said, compared with South African debt forecast to peak at 40.3 percent of GDP in 2016 and more than 100 percent for Italy, Portugal and Cyprus.

The land-locked nation, which had $2.7 billion of its obligations forgiven by the World Bank in 2006, is seeking to tap investor demand that enabled it to increase last year’s offering by 50 percent and Tanzania to lure four times the amount it sought last month. Zambia is considering the sale even as its overseas borrowing costs rise faster than other sub-Saharan African countries, and the kwacha drops.

“Sooner would be better than later,” Yvette Babb, an Africa strategist at Johannesburg-based Standard Bank Group Ltd., the continent’s largest bank, said by phone April 16, citing investor demand for international debt from the continent. “There would be a concern from the investor community at the pace that the government is raising debt.”

Higher Offering

Yields on Zambia’s dollar-denominated bonds due September 2022 have jumped 27 basis points since being issued in September and reached 5.50 percent at 4:29 p.m. in Lusaka. The increase is more than double the advance in rates on Senegal’s debt due in May 2021, also rated B+ by Standard & Poor’s. The average yield on African dollar bonds has dropped nine basis points over the period to 4.57 percent, while developing-nation debt on average yields 4.9 percent, according to JPMorgan Chase & Co. indexes.

Zambia is seeking to fund road, rail and power projects to help lift its 13 million citizens out of poverty. The kwacha currency weakened 0.6 percent to 5.355 per dollar by 4:00 p.m. in Lusaka, extending its decline this year to 3.1 percent.

Higher relative yields helped Zambia draw 24 times more demand than it sought when marketing notes in September to investors in London and the U.S., spurring other African countries including Kenya, Angola and Tanzania to consider international bond sales. Rwanda, which started roadshows this week for its debut Eurobond, may boost the size of its $400 million offering to meet demand, according to London-based Exotix Ltd. Tanzania’s private sale of $600 million of bonds in March was four times oversubscribed.

Open Window

“The international liquidity window is open and ripe and may not be there forever,” Sampa said in the April 16 interview. “It’s a question of striking while the iron is still hot.”

State-owned companies, including power utility Zesco Ltd., the Roads Development Agency and Zambia Railways Ltd. have said they plan to sell their own bonds totaling as much as $4.5 billion. The finance ministry would rather raise the money on behalf of the companies and then distribute it, Sampa said. “We do not want a free for all.”

A debt level of 40 percent of GDP may be “somewhat excessive” because of Zambia’s dependence on copper, Razia Khan, the head of Africa economic research at Standard Chartered Plc in London, said by phone on April 17. The country currently has a debt to GDP level of about 30 percent, according to Sampa.

Political Risk

Investors may be under-estimating political risks, Eurasia Group Ltd., a Washington-based consultancy, said in an April 11 report. President Michael Sata’s “mercurial and autocratic governing style may present heightened policy risk in an economic downturn or political crisis,” Eurasia analysts including Clare Allenson said in the note.

“Swift changes in monetary policy and mining rules have been rushed,” she said in an e-mailed reply to questions April 17. Zambia will probably pay a higher yield at its next sale, Allenson said.

Sata fired the governor of the central bank and its board, reversed a foreign takeover of a lender and halted mineral exports within two weeks of taking office in September 2011.

Copper reached the lowest level in almost 18 months in London yesterday on concern slowing growth from China to the U.S. will curb demand. Zambia, which the International Monetary Fund said April 16 will expand its economy by 7.8 percent in 2013, relies on copper exports for nearly 80 percent of its foreign-currency earnings.

Currency Law

The government will probably implement a law allowing the central bank to monitor and regulate foreign currency flows over “the next few days,” Sampa said. The rules, which would require exporters to bank foreign currency with Zambian lenders, will cause the kwacha to strengthen to below 5 per dollar, he said in an interview on March 20. .

The finance ministry will consider hedging contracts for “a fraction” of future foreign-currency bonds, Sampa said. It’s not planning hedges for existing debt and will start putting dollars into a sinking fund once the nation’s Eurobonds are in their third year, he said.

“Scenarios at the moment don’t warrant a currency swap,” Sampa said. “These concerns on the kwacha and copper are only in the short-term, the prognosis looks good for copper and the kwacha in medium- and long-term.”

Any new international debt sales would have to be approved by cabinet and parliament, he said.

Putting in place a currency hedge on foreign-denominated debt would be a “prudent strategy,” given fluctuations in the kwacha and copper prices, said Standard Bank’s Babb.