Lusaka - Zambia, which 13 months ago issued its first international debt, is considering the sale of a record $1 billion Eurobond to plug a budget deficit that contributed to a credit downgrade.
Africa’s biggest copper producer will try to contain some spending to reduce the southern African nation’s fiscal shortfall to below the forecast of 8.5 percent of gross domestic product for this year, Treasury Secretary Fredson Yamba said in a phone interview from Lusaka, the capital, today.
The government this month raised its estimate for the gap from 4.3 percent and is finalising as much as $250 million in syndicated loans as funding needs are pushed higher by government spending on wages and subsidies.
Yields on Zambia’s $750 million of bonds sold have climbed 159 basis points since being issued in September 2012 compared with an average 123 basis-point increase for dollar-denominated African debt tracked by JPMorgan Chase & Co. Fitch Ratings yesterday lowered Zambia one step to B, five levels below investment grade.
Standard & Poor’s downgraded its outlook to negative on October 25, while retaining its B+ rating.
The sale of a second Eurobond “is one of the avenues available,” Yamba said.
“We are looking at various options. We have to go out there and see which is the cheapest source.”
While Zambia would be able to sell a $1 billion Eurobond, it will be more expensive than its debut securities, Chris Becker, a market strategist at Johannesburg-based ETM Analytics, said by phone.
A sale would follow record issuances by African nations, including debut bonds from Rwanda and sales by Ghana, South Africa and Nigeria, with plans by Tanzania, Kenya and Senegal to tap international markets
“At the moment things are looking quite good and there’s a rush of issuances coming through,” Becker said by phone.
“It’s sort of a sweet spot for African Eurobond issuances.”
Fiscal stimulus from the Federal Reserve will probably continue until next year, providing a window for new bond sales from African countries, he said.
Zambia’s Eurobonds may underperform others from the continent because of its aggressive issuance, while the Fitch downgrade will also push yields higher, Becker said.
Zambia’s kwacha weakened 1 percent to 5.45 per dollar by 2:26 p.m. in Lusaka, the worst intraday level since August 13.
Yields on the Eurobonds due September 2022 rose 3 basis points, or 0.03 percentage point, to 6.75 percent, the highest in a week.
The government, which is one of the biggest employers in Zambia, plans a two-year freeze on the pay of government workers and a halt to hiring, after increasing salaries by as much as 50 percent in September. The public-wage bill will account for 53 percent of government revenue in 2014.
“Spending will over-run again in 2014, reflecting the cost of the wage increase and higher debt service costs,” Carmen Altenkirch, an analyst at Fitch, said in yesterday’s report. “Wider deficits will place upward pressure on key debt ratios.”
The government plans to raise 7 billion kwacha ($1 billion) in foreign financing, including 5.5 billion kwacha in program loans, to fund 16.4 percent of the 2014 budget, Finance Minister Alexander Chikwanda said in his Oct. 11 budget speech.
The economy will probably expand at least 7 percent next year, while the inflation rate will be 6.5 percent or less by December 2014, Chikwanda said. GDP growth this year is forecast at 6 percent by the International Monetary Fund. Inflation eased for a second consecutive month in September to 7 percent.
“We are cautious that as a government we really need to move in a much more predictable manner and make sure that resources are also managed in a very rational manner,” Yamba said. - Bloomberg News