Zambia misses Eurobond payment

Zambia is being closely watched as a test case for how borrowers and creditors might navigate a broader debt crisis.

16 November 2020 | Economics

Chris Mfula and Karin Strohecker - Zambia is on course to become Africa's first pandemic-era sovereign default: The country couldn’t pay an overdue Eurobond coupon before a 30-day grace period expires at the end of Friday.

Zambia missed payment of a US$42.5 million coupon on one of its US dollar-denominated sovereign bonds last month.

The government had requested that bondholders grant it a deferral of interest payments until April as it struggles with the dual burdens of fighting the pandemic and a limping economy. But the creditors rejected that request earlier on Friday.

"They will not support the standstill or consent solicitation and, given our precarious position that requires us to treat all creditors equally, we have no other alternative but to accumulate arrears," finance minister Bwalya Ng'andu said.

He said Zambia was continuing to engage with bondholders through its advisers and hoped that would "lead to some solution along the way".

Negotiations with the International Monetary Fund (IMF) were also continuing, he said, but declined to give further details.

The IMF said separately through a spokeswoman that any financial support for Zambia would be contingent on the country taking steps to restore debt sustainability.

CLARITY

A source familiar with the thinking of the Zambia External Bondholder Committee - a large group of creditors holding more than 40% across all Zambia's bonds and a blocking stake in each issue - said they had for six weeks sought clarity from the authorities about a credible medium-term framework for restoring fiscal sustainability.

"Authorities have not addressed any of these concerns anywhere close to a degree which would have allowed bondholders to consider providing near-term relief," said the source, who asked not to be named.

Bondholders also wanted more information on how Zambia plans to deal with other creditors, including Chinese lenders.

"Most of the debt is owed to China," said Luc D'hooge, head of emerging markets bonds at Vontobel Asset Management, a bondholder that is not part of the creditor committee.

"Bondholders don't want to accept haircuts or lose value and just finance China. There's been no real communication about that," he said.

WHAT NEXT?

With a number of African countries struggling with unsustainable debt, Zambia is being closely watched as a test case for how borrowers and creditors might navigate a broader debt crisis.

"While debt vulnerabilities are elevated for several countries in the region, country circumstances across the region vary significantly," said the IMF, pointing to G20 Debt Service Suspension Initiative (DSSI) relief and IMF emergency financing as backstops.

"Unfortunately, this will not be enough for some countries whose debt may be pushed beyond the limits of sustainability by the pandemic crisis."

Even before the coronavirus pandemic caused a global economic slowdown, Zambia was struggling with mounting debt.

DATA

Data from Lusaka showed Zambia's total external debt stock stood at US$4.8 billion, or 18% of gross domestic product, at the end of 2014. Five years later, it had more than doubled to US$11.2 billion, or 48% of GDP.

The IMF predicts a rise to nearly 70% of GDP by the end of this year.

Its US$3 billion in outstanding Eurobonds are not Zambia's only debt. It owes some US$3.5 billion in bilateral debt, US$2.1 billion to multilaterals and US$2.9 billion to other commercial lenders. It owes about US$3 billion to China and Chinese entities.

Zambia's kwacha has tumbled nearly a third since the start of the year, adding to the pressure.

Zambia does benefit from the DSSI. However, external debt owed to Paris Club of creditor nations makes up just 2% of total external debt and 2.5% of external debt service due in 2021.

Zambia's dollar bonds traded around half a cent on the US dollar higher on Friday, giving away some of their earlier gains and changing hands at 44 to 46 cents on the dollar, according to Tradeweb data. – Nampa/Reuters

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