Citigroup Inc and JPMorgan Chase & Co are among investors stocking up on Zambian dollar debt, anticipating that a growth revival and an IMF aid package would help the southern African nation plug its yawning budget deficit.
Citigroup started adding Zambian debt on June 10, while JPMorgan moved its holding of the nation’s dollar bonds to overweight, seeing room to “earn considerable pickup” amid signs of an improving economy. The bonds returned 7.3 percent last month, the most among 18 African nations monitored by Bloomberg.
The yield on Zambian dollar bonds due in 2024 has declined more than 500 basis points from a February high of 16.3 percent, but is still more than 3 percentage points higher than that of debt by similarly rated Ethiopia.
Ranked five levels below investment grade by S&P Global Ratings and Fitch Ratings, Zambia — heavily reliant on copper — expects negotiations with the IMF to start in October and move to board level in December.
With developed-nation yields likely to remain low for an extended period after the UK voted to leave the EU, Zambian debt offers returns that are hard to find elsewhere, Citigroup said.
“We continue to like the position” in Zambian bonds, said Luis Costa, Citigroup’s London-based chief strategist for eastern Europe, the Middle East and Africa. “The IMF deal is a supportive factor. From the risk-reward point of view, it is a very interesting long, despite Brexit.”
While the southern African nation has said it expects an aid program from the fund by the end of the year, a deal might not be that easy, as it is likely to require the government to cut energy subsidies.
The IMF in March estimated the payments could cost the Zambian treasury US$660 million this year. Increasing prices at a time when inflation already exceeds 20 percent might be unpopular in the buildup to general elections next month.
This year’s budget shortfall is likely to be slightly smaller than last year’s 8.1 percent of GDP, Zambian Deputy Minister of Finance Christopher Mvunga told reporters in May.
That is still more than twice the 3.8 percent deficit Zambian Minister of Finance Alexander Chikwanda targeted in his budget statement this year.
JPMorgan sees a stabilizing exchange rate and improved rainfall supporting Zambia’s economy, while expecting that fiscal austerity would get the government through the coming months. The bank expects the fiscal deficit to remain below 8 percent of GDP this year.
Zambian President Edgar Lungu in May said the nation would only access IMF support if the lender’s conditions are acceptable, and not all investors are convinced about the positive outlook for the nation’s debt.
While Zambia’s Eurobonds have remained buoyant, underpinned by anticipation of an IMF support package materializing within months of the new government being formed after next month’s vote, the optimism is misplaced, said Rhombus Advisors LLC, a consultancy that advises hedge funds and private-equity firms on African economies.
Given “the ambivalence of local authorities, we have considerable reservations about any investment strategy that is dependent on an IMF support package,” Rhombus founder Omotunde Mahoney wrote in a research note on June 21. This “would set the stage for a potentially significant correction in Zambian asset prices.”
While there might be delays on the path to an IMF agreement, demand from China would support the copper price, buoying the economy, which relies on the metal for more than 70 percent of export revenue, said Lutz Roehmeyer, director of fund management at Landesbank Berlin Investment.
“We are positive on economic growth and expect normal demand for commodities,” said Roehmeyer, who is overweight Zambian dollar bonds. “African exporters should perform well with rising commodities.”
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