Africa markets face tight liquidity

Sunday, 25th September, 2011

JOHANNESBURG: A 12-year infrastructure bond is likely to be under subscribed at an auction in Kenya next week due to tight liquidity and high inflation, while Zambia?s bond market will be paying close attention to the new president?s first moves.

Yields on Kenyan government securities are seen rising at auctions next week due to tight shilling liquidity, but traders expect lower subscription rates as the central bank struggles to keep the cost of borrowing down.

The Central Bank of Kenya (CBK) will sell a 20 billion shilling ($206.9m 12-year infrastructure bond (IFB) with a coupon of 12% next week, which traders expect will attract bids at higher rates and could be undersubscribed.
?High inflation and tight liquidity will dictate the subscription rate for the IFB,? said Renaldo D?souza, an analyst at Nairobi-based Genghis Capital.

"We are unsure of what the CBK is willing to accept because, as observed in recent auctions, investors are demanding a premium for funds lent to the government."

The weighted average yields on a re-opened two-year bond and 182-day Treasury bills auctioned on Wednesday climbed in line with market expectations, but were heavily under-subscribed due to a liquidity squeeze in the money markets.

The yield on the 91-day Treasury bill rose to 13.193% at an auction on Thursday from 12.570% last week, but it was oversubscribed by 58%, attracting bids worth 7.9 billion shillings for the five billion shillings on offer.

This week, the Central Bank will sell 91-day Treasury bills worth four billion shillings and 182-day bills worth three billion shillings.

Traders said the central bank was rejecting most of the high bids -- mostly from commercial banks -- to avoid crowding out investors due to the rising cost of borrowing.

An orderly transition following Zambian presidential elections is likely to boost market confidence, though bond investors? reaction to Michael Sata?s unexpected victory will not be known until a treasury bill auction next week.

A liquidity squeeze in Uganda is likely to push yields even higher, while the uncertain global environment may deter foreign investors in the coming weeks, traders said.

The results of this week?s treasury bill auction were mixed, with yields on 91- and 182-day papers rising to 17.41 percent and 18.53 percent respectively, from 17.06 percent and 17.77 percent at an auction two weeks ago. The yield on the 364-day bill, which received far higher bids than the other two instruments, fell to 19.85 percent from 20.44 percent.

The Bank of Uganda accepted bids worth 7.9 billion shillings ($2.7 million) for the 91-day bill, compared to 10 billion offered, and 11.9 billion shillings for the 182-day bill, though it had aimed to raise 20 billion.

Traders said this was a sign that while the bank was willing to allow rates to go up, it was not prepared to accept everything that was offered.

"If the central bank had taken everything that was on offer I think they would have seen a 20 percent cut off on the 91-day and a 21 percent cut off on the 182-day," said Raymond Mutibwa, head of rates and credit trading at Standard Chartered Uganda.

PV Shreedharan, head of treasury at Diamond Trust Bank, said there was a lot of demand for the 364-day bill because of the high yield.

"Since the 1-year is longer term there are a lot of people who would like to lock in the high rate for the longer period," he said. ?20 percent is quite attractive so there?s been demand for the 1-year paper.?

Shreedharan said he expected yields to continue rising given high inflation and turmoil in the global markets.

"Rates are likely to continue to remain high,? he said. ?It?s a combination of factors. You have high inflation, you have turbulence across the world. This uncertainty is going to continue for some time."

Mutibwa said although there had been strong foreign interest this week, it was unlikely to be repeated at the next auction.

"I don?t expect them to come back in a fortnight," he said of foreign investors. "The global picture looks a bit gloomy at the moment. I don?t see them adding to their emerging market portfolios at the moment."

NIGERIA

Nigerian bond yields are expected to hold steady next week, though some tenors could decline due to an expected increase in naira liquidity from monthly budgetary disbursals.

Nigeria distributes funds monthly to its three tiers of government - federal, state and local - from its centrally held account where proceeds from crude oil exports and taxes are deposited.

On Tuesday, Africa?s top crude exporter released 607 billion naira ($3.8 billion) from federal accounts to its three tiers of government for August. The money is expected to come into the system on Friday or Monday.

"We are expecting strong demand, especially on the 3-year bond next week with the inflow of cash from budget allocations and definitely yields will decline," one dealer said.

Dealers said trading was quiet in the week, while there was no reaction to the recent hike in the central bank?s benchmark interest rate because it was in line with expectations.

"The market has gotten used to the frequency in the increase of the MPR (monetary policy rate) so it does not react any longer," another dealer said.

The 3-year bond was trading at 10.40 percent on Friday, after opening at 10.50 percent on Monday, while the 4-year paper inched up to 11.35 percent from 11.24 percent.

The 7-year was at 11.55 percent, compared to 11.48 percent, and the 20-year paper was at 12.0 percent, unchanged from Monday?s level.

($1 = 96.7 Kenyan shillings) ($1 = 4975 Zambian kwacha) ($1 = 2885 Ugandan shillings) ($1 = 157.375 naira) (Reporting by Tosin Sulaiman, Kevin Mwanza and Oludare Mayowa;

Kenya cbank sells dollars after shilling slide

NAIROBI, Sept 23 (Reuters) - Central bank of Kenya sold an unspecified amount of dollars in the local foreign exchange market on Friday after the shilling slid to a new all-time low of 99.12 against the dollar earlier in the session.

The shilling firmed 0.8 percent to trade at 98.00 in the minutes after the intervention, the central bank?s fourth sale of dollars this month.

Turmoil in the euro zone has hammered the shilling this week, but the currency started its steady weakening long before the Europe?s debt woes rattled frontier markets.

Reuters