Zambia Enjoys an Impressive Bond Debut

on Sep 20, 2012

On 18 September 2012, the Financial Times reported on Zambia’s highly successful international bond debut, which was warmly received by investors. The sub-Saharan country recently joined the group of several other African countries such as Gabon, Ghana, Namibia, Nigeria and Senegal which have already sold international debt.

According to the FT article, investors placed approximately $12 billion worth of orders (£7.4 billion) for Zambia’s maiden 10-year dollar-denominated bond, allowing it to increase the size of issue from the proposed $500 million to $750 million. “Demand looks very good,” noted Sashi Kumi, a credit and fixed-income trader at Nedbank Capital, as quoted by Bloomberg. “The Africa story, in general, is carrying favour with investors. People see great growth on the continent.”

And yet it is not only “the Africa story” that has contributed to the marked success of Zambia’s international bond debut, considering that with the exception of South Africa, sub-Saharan African countries do not have a very good bond market record. Zambia, however, has a robust economy, which apparently managed to attract investor attention.

!m[](/uploads/story/426/thumbs/pic1_inline.png)As noted in the FT article, Zambia is Africa’s largest copper exporter, and an economy which has shown an average 5.8 percent growth per annum in the decade to 2011. In addition, its government debt is estimated to be only about 22 percent of gross domestic product. Bloomberg reports that Zambia’s economy is expected to expand 7.7 percent in 2012, reflecting strong growth in copper output and agricultural products with the exception of corn, according to the central bank. “We forecast a good performance for Zambia’s economy this year, with real per-capita gross domestic product increasing by slightly more than 5 percent,” S&P analysts noted in a statement, as quoted by Bloomberg. “The economy has been buoyed by an exceptional maize harvest in 2011, high copper prices, and strong investment in the mining sector.” This year, Zambia’s kwacha has gained 2.1 percent against the dollar, being Africa’s second-best performer after Nigeria’s naira.

Yet, despite the generally positive outlook for Zambia’s economy, which is the main reason for its impressive debut on the international bond market, investing in Zambia does not come without risk. As noted in the FT article, the country is extremely exposed to copper prices, with the metal accounting for about 80 percent of exports. In addition, the fiscal deficit is widening on account of the government’s expansionary budget.

The FT also notes that among the risks associated with investing in Zambia’s economy is the country’s domestic politics. According to Philippe de Pontet, Africa director at the risk consultancy Eurasia Group, the price Zambia paid for its bond discounted the political risks as well as the fiscal vulnerabilities. “President Michael Sata’s unpredictable and confrontational style of governance will likely raise risk perceptions – and alienate some investors and donors – even if macro-economic management remains largely sound,” he pointed out in a note, as quoted by the FT. Bloomberg reports that the credit rating agency Fitch lowered the outlook on Zambia’s rating because of lack of certainty in government policy following the election of President Sata in September 2011.