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Zambia came closest to becoming the first African nation to default on its dollar bonds since the start of the coronavirus, making it a test case for nations around the world struggling to meet their obligations to a variety of from lenders, from bondholders to Chinese state banks.
Holders of Zambia’s $ 3 billion Eurobonds will vote next week on the country’s request for a six-month interest payment holiday. A core group of creditors has already rejected the proposal, prompting Zambia to say Tuesday that it will not be able to repay its 3 billion Eurobonds unless it gets relief.
The heart of the matter is how commercial creditors are treated in a planned restructuring. Eurobond holders want the government to sign an economic program with the International Monetary Fund before tackling their commercial debt.
But Zambia’s debt levels are significantly above Washington-based lenders’ thresholds, and a 10-month general election makes deep spending cuts less likely. There are also questions about transparency around borrowing from China, which accounts for roughly a third of the country’s $ 12 billion of foreign debt.
Demand transparency
“Zambia is between a rock and a hard place, with the IMF demanding transparency on Chinese lending and the political economy heading into next year’s elections, making them reluctant to withdraw from infrastructure projects, mostly supported by Chinese, “said Ron Raychaudhuri, an emerging market-fund manager at APG Asset Management in Amsterdam. “Some Chinese lenders also appear reluctant to allow a moratorium until arrears are resolved.”
The Group of 20 agreed on Wednesday to renew a debt relief initiative for the poorest countries until at least the first half of 2021, according to World Bank President David Malpass, who warned that it may not be enough as the coronavirus pandemic strengthens poverty.
Read more: G-20 Expands Debt Relief Program Amid Warnings Not Enough
Zambian Eurobonds tumbled for a second day on Wednesday and are trading below half their face value. Notes due in 2024 fell 7% to 44.4 cents on the dollar as of 4:13 p.m. in London. A $ 42.5 million coupon on these securities expires on Wednesday, although there is a 30-day grace period before the country is technically in default.
Eurobond holders will meet on October 20 to vote on the suspension proposal. Rafael Molina, an adviser to a group that owns about 40% of Eurobonds, declined to comment on Wednesday.
“We have not yet received enough details from Zambian officials to vote on consent,” said Kevin Daly, chief investment officer at Aberdeen Standard Investments, which owns Zambian bonds. “I think having a dialogue would be more constructive than issuing press releases.”
In Africa, more than a dozen countries are in talks with China to freeze debt payments under a debt service suspension initiative agreed to by the Group of 20 major economies in April. However, many of those negotiations take place behind closed doors, prompting complaints from commercial creditors concerned that China will obtain better terms in the upcoming debt restructuring.
Engaging China
“It appears unlikely that the government will receive your request for a postponement,” Neville Mandimika and Daniel Kavishe, analysts at Rand Merchant Bank in Johannesburg, said in a note to the client. “To ensure smooth debt management, the government must involve China and its agencies in its deliberations.”
The only foreign currency debt that Zambia will continue to pay on time is to multilateral agencies and debt for some priority projects that have immediate economic and social impact, Treasury secretary Fredson Yamba said in an emailed statement Tuesday. . The country already has $ 485 million in arrears in foreign debt, including $ 183 million for bilateral lenders and $ 256 million in commercial loans, according to the Finance Ministry.
“If Zambia is unable to reach an agreement with its commercial creditors, including Eurobond holders, on the terms of the corresponding moratoriums, the Republic with its limited fiscal space will not be able to make payments,” Yamba said.
If the bondholders approve the status quo, Zambia “will recognize accrued interest on the coupons deferred in the restructuring process, at a rate to be determined in good faith with the note holders,” Yamba said.
–With the assistance of Alonso Soto.
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