T. Rowe Price, Amundi Among Winners as Zambia Bond Bets Pay Off
There is still more to be had from the rally in Zambia’s bonds -- the world’s best-performing dollar debt this year -- according to bondholders including T. Rowe Price and Amundi Asset Management who bought the securities after the country defaulted nine months ago.
That bet has paid off: Zambia’s Eurobonds outperformed all other emerging-market sovereign dollar bonds since the beginning of January, returning almost twice as much as its closest rival, Ecuador. The benchmark 2024 securities rebounded from around 42 cents, climbing to more than 75 cents this week after Hakainde Hichilema’s victory in the presidential election on Aug. 12.
T. Rowe Price was not invested in Zambia before the default, but saw an “attractive opportunity” afterward, said Samy Muaddi, a portfolio manager at the Baltimore-based firm. The country said in October it would restructure its debt, and suspended coupon payments a month later.
“Following the default there was much panic and uncertainty,” Muaddi said. “Having invested in the recovery of many countries following periods of debt distress we took a contrarian view.”
Investors such as T. Rowe Price and Amundi are betting Hichilema, who will be sworn in on Aug. 24, will be able to secure an International Monetary Fund economic program and associated $1.3 billion loan by the end of April, reducing the risk of losses for bondholders.
“Hichilema’s economic platform is based on private sector-led liberal market reform, which bodes well for the IMF program,” said Ray Jian, an emerging-market portfolio manager at Amundi, which has an overweight position in Zambia and added to it in the second quarter. “We do believe the cure of the bond default is one of Hichilema’s priorities, as a more market-based Zambia economy needs the bond market to partially finance its reform and growth program.”
The country’s dollar debt has returned 43% this year, according to a Bloomberg Barclays index. That compares with the average 0.7% loss for the 74-member gauge.
Still, some caution is warranted: “There are still many challenges for Zambia to work through,” said Muaddi. “Restoring market access after such a crisis requires a steadfast commitment to sustainable macroeconomic policy.”
For now, many investors are giving Zambia the benefit of the doubt. The country’s currency, the kwacha, has surged almost 10% against the dollar in the past week to the strongest level in more than two years. The country could reach a deal with the IMF as soon as the fourth quarter, though more likely early next year, according to Rand Merchant Bank’s Neville Mandimika and Daniel Kavishe.
“An IMF bailout would facilitate the restructuring of Zambia’s debt and increase the likelihood of it being accepted in other debt-assistance programs,” said Aleix Montana, Africa analyst at risk intelligence company Verisk Maplecroft. “Zambia’s commitment to reforming its public finances will be judged on the outcome of the negotiations with the IMF.”
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