Warning Signs for Zambia as Eurobond Curve Becomes More Inverted

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By Paul Wallace
(Bloomberg) — Zambia’s finance minister said this month
there’s no need to worry about the government’s debt load.
Investors are sending the opposite signal.
The yield curve for the southern African nation’s
Eurobonds, which are the worst performers in emerging markets in
the past year, is increasingly inverted — meaning that shorter-
dated securities have higher yields than those with longer
maturities. That’s a rarity and often occurs when countries are
already in default, with one example being Venezuela.
Yields on Zambia’s $750 million of bonds due in 2022 have
climbed almost 500 basis points since early February to 17.45
percent. Its 2027 bonds trade at 15.8 percent. No other country
that’s not in default has yields as high.
The inversion is partly because the shorter bonds have a
bullet maturity and have to be paid back in one go, while the
longer ones amortize, making them less risky, according to
Neville Mandimika, an analyst at Rand Merchant Bank in
Johannesburg. But it also suggests traders are getting more
nervous, he said.
“That yield curve inversion can be seen as an indicator of
how concerned investors are about the situation,” he said. “In
times of extreme debt concerns, the less risky bond will price
at a premium to the bullet bond.”
Finance Minister Margaret Mwanakatwe said in an interview
with Bloomberg TV on April 12 that Zambia is borrowing to
improve the country’s infrastructure and the debt should be seen
as an investment.
Africa’s second-biggest copper producer is battling to
shore up its finances and has been in on-off talks with the
International Monetary Fund for more than a year about a loan.
Bank of America says it could be forced into restructuring if it
fails to get an IMF bailout or friendlier terms on bilateral
loans from China, which it’s trying to renegotiate.
Investors are also watching dwindling foreign-exchange
reserves. They’ve halved in the past three years to $1.5
billion. They now cover barely 10 percent of Zambia’s external
debt, which is the lowest ratio among all African nations that
have sold dollar bonds, according to data compiled by Bloomberg.

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