Last Thursday's K450 million ($47m) Treasury Bill (T/bill) auction attracted K1.1 billion ($120m) in bids as yields fell for the second auction in a row:
The 364 day bill received K544 million ($57m) in bids and with its yields falling 1.5% to 25.5%. The The 273 (26%) and 182 day (25%) bills were also over-subscribed with their yields falling by 1.4% and 1%, respectively. Yields on the 91 day bill remained unchanged from the previous auction as the instrument was under-subscribed by 35%. Bank of Zambia (BoZ) allocated the full K450 million.
BoZ had cut down the size of T/bill auctions by 50% in February 2016 (from K900m to K450m) as the Government looked to pull back on domestic borrowing which had significantly pushed up yields -- ergo negatively impacting private sector borrowing.
Commercial Banks were holding 63% of the K10.6 billion ($1.1bn) of outstanding balance of T/bills as of April 15 2016.
Inflation declining and Kwacha Rising
The Central Statistics Office (CSO) announced that year-on-year inflation had declined to 21.8% in the month of April.
The decrease was mainly attributed to decreases in the prices of non-food items such as motor vehicles. Inflation had ballooned in the final quarter of 2015 before peaking at 22.9% in February 2016. An 18% appreciation in the Zambian Kwacha versus the US Dollar year-to-date should push inflation downward in the coming months, ceteris paribus.
T/bill yields have been attractive for a while (double digit yields) but failed to attract significant interest from investors at auctions because of a lack of confidence in the Government to reign in the fiscal deficit, a significant decline in the Kwacha against major currencies (plus inflationary effects) and the economic impact of the 1,00MW power deficit. However, confidence would have been renewed by news of an agreement between the Government and IMF on a program to be finalized in Q4 2016, positive sentiment about the mining sector and the Kwacha's recent bullish run (with positive impact in various sectors).
The Central Bank's Monetary Policy Committee (MPC) will meet this month to make a decision on the policy rate. Based on current economic data, they are likely to keep things unchanged.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *