Zambia’s debut $750m Eurobond puts focus on Africa

“There is a great appetite for Africa credit and a lack of supply,” is the comment from Standard Bank group analyst Yvette Babb interviewed by Bloomberg as Zambia went to the global market yesterday (13 September) with a USD750 million 10-year bond priced at a final coupon of 5.625%. It is Zambia’s first international bond and will be used to fund its budget and invest in infrastructure.

Reuters reports that the bond has “come 25bp tighter than initial guidance after generating an order book in excess of USD11bn”. Barclays and Deutsche Bank are the leads for the bond issue, although a roadshow reportedly planned for August was delayed.

Bloomberg also quotes Sashi Kumi, a trader at Nedbank Capital “Demand looks very good. The Africa story, in general, is carrying favor with investors. People see great growth on the continent.” The story noted that yields on Ghana’s eurobonds maturing 2017 have dropped 170 basis points, or 1.7 percentage points, this year to 4.85%.

Fitch Ratings and Standard & Poor’s have both rated the bond B+. Fitch says that this matched the southern African nation’s sovereign rating, which has negative outlook. It is 4 levels below investment grade. Fitch comments: “Zambia’s ‘B+’ rating is supported by its political stability, combined with a decade of growth above 6%, buoyed by macroeconomic stability, policy reforms as well as the emergence of a vibrant copper mining sector. Added to this, the country has a track record of fiscal discipline under IMF surveillance, with gross public debt of 22% of GDP, below the ‘B’ category median. External finances are a key strength, with the IMF/World Bank Debt Sustainability Assessment putting the risk of debt distress at low. External debt ratios are below ‘B’ and ‘BB’ peer group medians.

“The prospects for growth beyond 2012 are less certain. Growth in mining production could be constrained by weaker growth in China, Zambia’s main export destination, as well as persistent capacity constraints. The revision of Zambia’s Outlook to Negative on 1st March 2012 reflected concerns about the direction of economic policy since the change of government in 2011. Concerns centred around the reversal of a privatisation deal without as yet compensating the investing parties, which could undermine property rights, while proposed reforms of the mining and banking sectors could risk unintended consequences in terms of their potential impact on investment, and consequently on the growth outlook and macro-economic stability.”

S&P also highlighted the strong growth story – Bloomberg says it will grow by 7.7% in 2012, S&P says real per capita GDP will increase by slightly more than 5%. However, it also highlights policy issues: “We estimate GDP per capita at $1,510 in 2012. In addition, the balance of payments is vulnerable to swings in copper prices (copper accounts for about 80% of exports) and the government’s economic policy direction since the October 2011 elections remains uncertain. The ratings are supported by promising investment and economic growth trends, a fairly strong external balance sheet, and moderate general government debt, which has benefited from debt relief and nominal GDP growth.

“We believe some cabinet members’ apparently uncoordinated and sometimes contradictory views have added to economic policy uncertainty. This relates in particular to windfall tax, export tracking, and the government’s participation in the mining sector. We view positively the government’s objective to promote good governance and transparency. However, its reversals of several privatizations on the grounds of a lack of transparency and flawed processes may be perceived as politically motivated.”

A report by Carol Dean of the Wall Street Journal highlights the fundamentals: “It is looking to borrow money more cheaply than Portugal and only slightly more expensive than Spain. But rather than raise money to support a collapsing economy, Zambia’s money is going to be used for real economic development and growth. That is something rare in the old developed world. The proceeds are to be invested in developing energy, railways, roads and other infrastructure projects. In stark contrast to the euro-zone’s sluggish growth at best, Zambia’s economy has grown from 6.4% to 7.7% over the 2009 to 2012 period and enjoyed falling inflation, low debt and a stable balance of payments.

“And despite the pitfalls of possible mining reforms and nationalizations, the rare opportunity to invest in a sovereign growth story plus the ever present hunt for yield, is likely to make this deal fly.”


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