Zambia Cuts Local Debt Auction Sizes After Yields Hit Record

  • Government planning to cut spending as revenues shrink
  • Zambia wants to free up funds for lending to private sector

Zambia will cut the sale of treasury bills by half after yields climbed to a record as Africa’s second-largest copper producer seeks to cut spending and encourage private borrowing, said Deputy Finance Minister Christopher Mvunga.

The central bank will offer 450 million kwacha ($40 million) of treasury bills at an auction this week, down from the 900 million kwacha on offer in January, when yields on the one-year securities reached 27 percent, compared with a rate of 14.49 percent for similar Kenyan securities. The bank will also cut the amount of bonds it will put out to tender by 40 percent to 600 million kwacha.

Zambia’s budget has come under strain as prices for the copper the country depends on for more than 70 percent of exports languish near six-year lows and a power crisis cuts output. The government has run consecutive budget deficits that it has financed both locally and externally, leading to higher borrowing costs. President Edgar Lungu announced spending cuts in November as Zambia tries to rein in the deficit.

“As you reduce expenditure, the need for borrowing also reduces,” Mvunga said by mobile phone Tuesday. “The reality is we don’t want to crowd the domestic market. It’s part of the effort to promote private participation in the domestic market.”

The government is seeking to borrow 2.5 billion kwacha locally this year, according to Finance Minister Alexander Chikwanda’s budget speech in October. That’s about a third less than the amount budgeted for in the previous year.

First Reduction

The Bank of Zambia’s treasury bill auction sizes have gradually grown since 2012, when it offered 350 million kwacha in January of that year. The reduction in the bonds and treasuries the central bank is offering is the first in at least four years, according to data from the Bank of Zambia compiled by Bloomberg.

The yields on Zambia’s $1 billion Eurobonds due 2024 rose 2 basis points to 15.47 percent by 11:18 a.m. in Lusaka, the capital. That compares with 14.69 percent for similar-maturity dollar debt of Ghana, rated a step lower at Moody’s Investors Service and Standard & Poor’s.

The International Monetary Fund cautioned Zambia in November to cut spending amid falling revenues and rising debt costs. “Domestic and external financing conditions have tightened markedly, with increased interest rates on Zambian government debt.,” Tsidi Tsikata, who led a visiting team from the lender, said at the time.

While Zambia has offered 900 million kwacha at treasury bill auctions since October 2014, demand has been weak even as yields rose. At the last auction in January, the central bank sold 900 million kwacha worth of securities. Two weeks before that, the sale raised 232 million kwacha. Inflation rose to a 12-year high of 21.8 percent last month.

“Yields across the curve have been under considerable upward pressure over the past year, amid rising inflation expectations, concerns about public sector borrowing requirements and exchange-rate pressure,” Johannesburg-based Standard Bank Ltd. said in a note to clients last month. The government reducing domestic borrowing “could be supportive of bills and bonds if seen through.”

Still, yields may only fall “marginally as doubts linger over the government’s ability to stick to the domestic borrowing target,” before general elections in August, Standard Bank said.

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