Zambia’s inclusion in J.P. Morgan’s new frontier-market bond index is expected to increase the visibility of the country’s local-currency government bonds among international investors.
J.P. Morgan is preparing to launch the GBI-EM Edge index, which will track almost 330 billion U.S. dollars in local-currency government debt across 26 frontier-market economies. Zambia is among the countries included in the new benchmark.
But what does this mean for Zambia?
In simple terms, an index is a reference point used by large international investors to compare different markets and decide where to put their money. Being included means Zambian government bonds will be more visible to international funds that invest in frontier-market debt.
These bonds are issued by the Zambian government in Kwacha. Investors buy the bonds and, in return, receive interest over an agreed period before their money is repaid.
The attraction for investors is the relatively high return. J.P. Morgan estimates that the new frontier-market index could have an average yield of about 10.4 percent. This is around 4.4 percentage points higher than its mainstream emerging-market local-currency bond index.
However, the higher return also reflects higher risks.
For an international investor, earning a high interest rate on a Zambian bond does not automatically mean making a high return in U.S. dollar terms. If the Kwacha loses value against the dollar, some or all of the investor’s gains from the bond can be reduced when the money is converted back into dollars.
There is also what is known as liquidity risk. This simply means that in a smaller market, it may not always be easy for an investor to quickly sell a bond and get their money back at the price they want.
Investors also face sovereign risk, which is the risk associated with the government’s ability to meet its financial obligations.
This is why inclusion in the J.P. Morgan index should not be seen as an automatic guarantee that Zambia will immediately borrow at lower interest rates.
Instead, it gives Zambia greater access and visibility in the international investment community.
The development also reflects changes in Zambia’s domestic bond market.
The Bank of Zambia has been working with larger benchmark government securities, including five-, seven-, ten- and fifteen-year bonds, which can be reopened to increase their size and improve their tradability. These changes have helped Zambia meet the size requirements for inclusion in the new index.
The index will only include bonds with at least 250 million U.S. dollars equivalent outstanding and at least two-and-a-half years remaining to maturity, while individual countries will have a maximum weighting of eight percent.
For Zambia, this means the domestic bond market is increasingly being structured in a way that makes it easier for large international investors to participate.
This is particularly significant after years in which Zambia’s access to international financial markets was heavily affected by debt distress and the restructuring of its external debt.
The immediate opportunity is therefore to attract more investors into Kwacha-denominated government securities, increase trading activity and deepen the domestic capital market.
If that demand is sustained, it could eventually contribute to lower government borrowing costs and create a stronger benchmark for borrowing across the wider economy.
But that outcome will depend on several factors, including investor confidence, the stability of the Kwacha, inflation, government fiscal management and conditions in global financial markets.
So, while J.P. Morgan’s index gives Zambia an important new channel to international investors, the real test will be whether that international visibility translates into sustained investment, a deeper bond market and more favourable financing conditions over time.
By Rachel Mumba
