Election Turmoil in Zambia No Bar for Investors Seeking Yieldsby and
Economy battered by falling copper prices, power shortage
President seen seeking IMF bailout, whoever triumphs in vote
It’s been a tough 12 months for Zambia, Africa’s second-biggest biggest copper producer. The economy has been battered by a slump in the price of the metal, power shortages and a plunge in the currency, and as many as six people died in a violence-marred campaign before Thursday’s presidential elections.
Help may be on the way in the form of an International Monetary Fund package, enough to give foreign investors a reason to reach for near-double-digit yields, no matter who ends up running the southern African country.
Demand for Zambia’s $1 billion of securities due in April 2024 has driven yields from 10.88 percent on Aug. 3 to 9.48 percent as of 4:22 p.m. in the capital, Lusaka, near the lowest in a year, as investors anticipate an IMF bailout and seek higher returns in emerging markets as an alternative to low yields in developed nations.
“The search for yield is back on and Zambia offers plenty of that,” Stephen Bailey-Smith, senior economist at Denmark’s Global Evolution Fonds A/S, which manages $3.2 billion of assets, including Zambian debt, said by phone on Aug. 10. “An IMF deal is probably on the cards whoever wins. They could use the money.”
President Edgar Lungu, 59, who came to power in January 2015, is battling against eight other candidates, with his main threat coming from Hakainde Hichilema, a 54-year-old economist and businessman widely known as HH.
The contest was “the most competitive yet in the country’s history,” Ahmed Salim, a Dubai-based analyst at Teneo Intelligence, said in an Aug. 10 note. He estimates that Lungu, a lawyer seen as more populist than Hichilema, has a 55 percent chance of winning in the first round, for which he needs to get more than half the votes. The election commission expects to complete counting on Sunday.
The winning administration will be handed an economy growing at its slowest pace since 1998 and a currency that’s plummeted by 25 percent against the dollar in the past year, making Zambia’s Eurobonds more expensive to repay. With copper, which accounts for more than two-thirds of export earnings, trading near seven-year lows, Bank of America Merrill Lynch forecasts Zambia’s budget deficit will be 9 percent of gross domestic product this year.
All that has convinced investors that the president, whoever it is, will have no choice but to turn to the IMF.
“Fiscal pressures are acute,” Ronak Gopaldas, head of country risk at FirstRand Ltd.’s Rand Merchant Bank, said by phone from Johannesburg. “Regardless of what party is in power after the vote, an IMF program is seen as inevitable. Investors want a speedy resolution to the election and the snappy implementation of economic reforms, anchored by an IMF program, which they view as a stabilizing influence.”
Zambia’s dollar debt has already gained 26 percent this year, the most among 17 sub-Saharan African issuers tracked by Bloomberg, and 8.9 percent this quarter. There could be more advances, according to Boston-based Loomis Sayles & Co., which oversees $243 billion of assets.
While rising bond prices have pushed Zambia’s yields lower, they are still higher than those of most of its regional peers. Yields on a $750 million bond due in November 2025 for Cameroon, which, like Zambia, is rated B by S&P Global Ratings, are 7.97 percent.
“While Zambia’s economic situation is very challenging, the Eurobonds still trade cheap to similarly rated peers,” Rick Harrell, senior sovereign analyst at Loomis Sayles, said in an e-mail. “The preference for investors is for an HH victory, although both candidates have expressed a desire to move ahead with an IMF deal. Regardless of who wins, assuming the elections go smoothly, the removal of uncertainty by itself could propel the rally further.”