Editor's note : The Financial Times (UK) reported this week that Zambia is looking to tap the bond markets. The Government is undeterred by a crumbling currency, worsening fiscal deficit and rising debt repayment costs.
Zambia plans to become the first African government to tap global capital markets in 2014, providing an important test of investor demand for the continent's debt.
Deutsche Bank and Barclays are organising meetings with investors in the US and London this week and next ahead of a probable US-dollar denominated bond sale, which would break the lull in African sovereign issuance so far this year.
Zambia made a dramatic international bond market debut in 2012, when it attracted $12bn in orders – equivalent to more than half the country's gross domestic product – for an inaugural international issue. The strong demand pushed the yield down to just 5.63 per cent, which was then lower than Spain's government borrowing costs.
A year ago, Rwanda attracted more than $3bn of orders for a $400m 10-year bond sale, allowing bankers to tighten the yield to just 6.875 per cent.
But developing economies have since been hit by the turmoil triggered by the US Federal Reserve's moves to start "tapering" its asset purchases, or quantitative easing. Zambia's lustre has faded in particular after sharp falls in the price of copper, which accounts for about 70 per cent of the country's export earnings, as well as other economic setbacks.
The yield of Zambia's maiden bond maturing in 2022 – which moves inversely with the price – has climbed sharply since issuance to a peak of 8.25 per cent earlier this month. It declined 5 basis points to 8.14 per cent on Tuesday.
"Zambia is not doing as well [as other African countries] economically and fiscally," said Max Wolman, senior investment manager at Aberdeen Asset Management. Its new bond would "have to be fairly attractively priced. Investor appetites are definitely not as strong as they were in 2012."
Since the Fed started "tapering" its asset purchases, the performance of African bonds has fallen behind other "frontier" markets. JPMorgan's NexGem index for frontier markets has returned 3.17 per cent this year, compared with the African gauge's 2.76 per cent total return.
Africa's bond markets have grown rapidly in recent years, with sovereign issuance last year exceeding $11bn – up from $6bn in 2012, according to Dealogic. "Africa is an area which has been quite hot for the past few years – and I don't think that is going to change – but demand for emerging markets in general is not so hot," said Mr Wolman.
But other investors struck a more cautious note. The scarcity of bonds in recent years had resulted in "stretched valuations", said Yerlan Syzdykov, head of emerging market fixed income at Pioneer Investments. "It was a very difficult market to invest in . . . We are still cautious because of the commodity [price] pressures."