Excerpted from this week’s Alterio Research report:

Given in particular the success of Namibia’s USD500mn maiden Eurobond last fall which saw an over-subscription of roughly 5.5x—largely a function, per pundits, of its perception as a proxy on SSA commodity wealth with a similar [Fitch] credit rating (BBB-) to South Africa (BBB+) but an approximate 200bp added spread—most observers expect Zambia’s impending offering in 2012 to be similarly received against a supportive macro backdrop defined chiefly by copper’s potential and relative price resiliency (in the face of developed market aggregate demand contraction) as well as accommodative monetary policy unconstrained by overly zealous inflationary pressures.

To the first point much like the supply side dynamic for crude whereby prices are likely to be supported going forward by limited spare capacity and inventory cover (irrespective of events stemming from China, Europe or even Iran), global mine output for copper—bluntly described by one analyst as ‘disastrous and getting worse’—was on track in late November to contract annually for the first time since 2002 while physical indicators in China (i.e. wire and cable demand and scrap shortages) now pose upside risks given deep discounts already ascribed to the effects of a credit-induced market crash there.  Such price stickiness would not only be welcome to Zambia, where the potential pace of Copperbelt output expansion over the next several years stand to make it the fifth-largest producer in the world, but somewhat imperative to post-election fiscal ambitions and thus of utmost interest to its creditors who will monitor the continued health of a current account balance now slightly in surplus (the 2012 budget, for example, is characterized by increases in social spending and farming subsidies as overall spending is slated to rise to 26.5 percent of gross domestic output from 21 percent).  To this end President Michael Sata’s decision to double mining royalties but withhold a much-ballyhooed windfall tax was not only prudent but in fact obligatory in our view given the unfortunate reality of infrastructural bottlenecks (i.e. transport and power supply related) and skilled-labor shortages that for the appreciable future will relegate Zambia to being a comparatively inefficient, high cost producer (though admittedly bond proceeds would theoretically begin to erode at least some of these concerns).

As to central bank easing, strategists suggest that Sata’s election in fact signaled a monetary policy paradigm shift towards cheaper funding costs.  Indeed within one week of former President Rupiah Banda’s defeat then-central bank Governor Caleb Fundanga, credited by some with helping to temper inflation into single digits for the first time in three decades, was removed.  Since then a 300bp reduction of the reserve ratio for both local and foreign currency deposits as well as the core liquid assets ratio, coupled with a general reduction of base lending rates (for now Zambia lacks an official benchmark rate per se) augmented liquidity while headline inflation fell sharply over the last three months of the year (7.2 percent y/y in December from 8.1 percent in November and 8.7 percent in October).  Taken together, and alongside a fairly resilient currency (due in part to central bank support) real yields remain attractive going forward as investors embrace a new political and perhaps monetary landscape in the new year.

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