2 January 2013

Zambia: U.S.$750 Million Eurobond - Zambia's Record-Breaking

THE acquisition of US$750-million Eurobond by the Government will go down as one of the Zambia's single most significant occurrences which helped to endorse economic policies last year.

It demonstrated that Zambia has been doing something right which triggered confidence into the issuer of the bond.

Obviously, that right thing has a lot to do with the sound economic performance Zambia recorded in the year just concluded and that of course makes the country look capable of repaying the funds along with the entailing interest.

When the news filtered through-on that auspicious September 13, 2012- that Africa's largest copper producer had sold its debut $750-million international bond, there was excitement among all stakeholders, or at least those who understood its implication.

"The 10-year, dollar-denominated debt went on sale at a final coupon of 5.625 per cent," said Sashi Kumi, a credit and fixed-income trader at Nedbank Capital's London-based unit.

Deputy Finance Minister Miles Sampa was particularly instrumental in the deal.

In achieving that feat, Zambia joined other Sub-Saharan African nations such as Nigeria, Ghana, Gabon, Senegal and Namibia that have sold international debts.

According to the World Bank, Zambia's economy was forecast to expand by 7.3 per cent in the foregoing year, reflecting strong growth in copper output and agricultural products.

The rate of inflation closed the year with the same percentage.

Added to this, the country has a track record of fiscal discipline under International Monetary Fund (IMF) surveillance, with gross public debt of 22 per cent of the Gross Domestic Product (GDP), below the 'B' category median.

The estimated GDP per capita was at $1,510 in 2012.

Additionally, Zambia's international 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.

These are some of the factors that endeared Zambia to the international financiers who saw its repayment possibility as having been more burgeoning than Portugal's.

That led to Zambia borrowing money more cheaply than Portugal and only slightly more expensively than Spain.

The international media reports indicate that, externally yields on Ghana's Eurobonds maturing 2017 dropped by 170 basis points, or 1.7 percentage points, last year to 4.85 per cent.

"We forecast a good performance for Zambia's economy this year, with real per-capita gross domestic product increasing by slightly more than five per cent," S&P analysts, led by Christian Esters in Frankfurt, said in a statement on the date Zambia made history.

They further said: "The economy has been buoyed by an exceptional maize harvest in 2011, high copper prices, and strong investment in the mining sector."

Zambia has budgeted to use the proceeds from the sale for investment in infrastructure and general support towards the 2013 Budget.

"The credit looks relatively robust, strong growth, current-account surplus, low levels of public debt," Yvette Babb, a Johannesburg-based emerging market strategist at Standard Bank Group Limited said.

"There is a great appetite for Africa credit and a lack of supply," Ms Babb further told Bloomberg as Zambia went to the global market to raise the funds.

It is Zambia's first international bond in a long time.

The bond was tighter than the initial guidance after generating an order book in excess of $11 billion but the Zambian government only took up $750 million of the amount.

That goes to show the financial prudence with which the Government is running the economy.

That total order book of $11.9 billion, also underscored investors' huge appetite for rare, high-yielding African assets.

"This is not only the largest order book for sub-Saharan Africa, but also at 5.375 per cent the lowest coupon, meaning the most favourable price," Finance Minister Alexander Chikwanda said in a statement then.

Barclays and Deutsche Bank were the leads for the bond issue.

Local and international economists contend that external finances are a key strength, with the IMF/World Bank Debt Sustainability Assessment putting the risk of debt distress at low.

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 will this year be invested in developing the energy, railways, roads and other infrastructure projects.

Mr Chikwanda said the $750 million which has been integrated into this year's Budget will not be used on consumption and hence will help to stimulate economic growth in the country as opposed to fueling consumption.

According to the 2013 Budget, the energy sector which is a power engine of any economy will receive $255 million from the total amount mainly for the generation and transmission of electricity.

The railway and road sector will get a lion's share of more than half of the total funds.

It will gobble up $430 million while the human capital and access to finance schemes will have $49 million.

Of that $49 million, $29 million will go towards the rehabilitation of the major hospitals to enhance health service delivery while the remainder, $20 million will towards the improvement of access to finance by the Small and Medium Entrepreneurs (SMEs) through the Development Bank of Zambia.

A further $14.6 million is for discount premium while the rest $1.4 million is for attendant fees and transaction costs.

"Zambia made her inau gural entry on the international market and raised $750 million, at a price that is one of the lowest ever for a debut issue for a Sub-Saharan African country.

"I assure this august house that the proceeds of this bond will not be utilised on consumption but on growth promoting infrastructure projects," Mr Chikwanda told Parliament in his 2013 Budget presentation on October 12 2012.

In blatant contrast to the euro-zone's lethargic growth, Zambia's economy has grown from 6.4 per cent to 7.3 per cent over the 2009-to-2012 period and enjoyed single-digit inflation, low debt and a stable balance of payments.

Some observers say the oversubscribing and the size of the order book was a reflection of the amount of liquidity that's now available in the advanced economies.

Zambia's low public debt levels, a current account surplus, and strong foreign direct investment inflows have been found irresistible by the foreign investors and lenders alike.

While Zambia's dependence on copper, which accounts for about 77 per cent of exports, is always seen as a source of concern, its strong fundamentals offset that and are seen as a factor that will support the bond in the future.

Over the years, investors have become familiar with Zambia's success story whose domestic bond market is open to foreigners.

The continued inflow of foreign investment and loan facilities to the country confirms that investors and lenders have become comfortable with the local market.

The country's major strength is the ever thriving economy which has now become a robust story.

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