T/Bill Yields Retreat as Government Starts to Scale Back on Domestic Borrowing

Yesterday’s Treasury bill (T/bill) auction attracted K311 million in bids of which K160 million were allocated:

The subscription rate on the 14th auction of the year declined to 34.58% (62.3% at auction 13). The Minister of Finance indicated that the Government would cut back on domestic borrowing to finance the 2015 fiscal deficit for fear of further pushing up yields - and subsequently interest rates:

Yields on the 364 days T/bill declined by 72 basis points from the previous auction to 23.52% after 8 straight months of consecutive increases. Yields on other instruments remained largely unchanged.

Eurobond 3

The Ministry of Finance is set to tap international bond markets for a third time to raise up to $2 billion in order to plug the projected K10 billion ($1.3 bn) fiscal deficit and complete priority capital projects.  Investors will be looking to be compensated for additional risks posed to the Zambian economy by depressed copper prices (LME Copper trading around $5,600), a vulnerable currency (down 19.7% ytd) and the negative impact of a 560 MW shortfall of electricity generation.

Standard and Poor’s downgraded Zambia’s credit rating to ‘B’ with a positive outlook on uncertainty that the Government would follow through with proposed fiscal consolidation measures with a general election on the horizon. Last year, while facing similar risks (albeit to a lesser extent), the market assigned Zambia’s $1 billion bond a yield of 8.625% with the auction oversubscribed by $4.25 billion.