Event

Last week, the Zambian government requested debt service relief from its (banking) commercial creditors and a six-month interest payment delay on its Eurobonds due in 2022, 2024 and 2027. Consequently, Zambia is set to become the first African country to default on its private debt since the covid-19 pandemic broke out.

Impact

Since 2015, President Lungu’s government has pursued unsustainable borrowing plans for a series of debt-financed infrastructure projects. Ever since, yearly fiscal deficits averaged around 8% of GDP, partly financed through tapping international bond markets and substantial Chinese loans. At the same time, disruptions in the copper industry, droughts and deterred investment flows depressed Zambia’s foreign revenues. Furthermore, the country was already struggling with a worsening external debt position before the global outbreak of covid-19.

Zambia’s economy is expected to contract by 5.1% this year. The covid-19-induced global crisis shocked tourism and copper revenues, generating serious fiscal and external imbalances in Zambia’s accounts. As a result, foreign exchange reserves dropped (below two months of import cover), pressure on the Kwacha augmented and the debt service burden became unmaintainable. The country’s gross government debt is projected to grow beyond 110% of GDP in 2020. Discussions over an IMF financial support programme have stalled for years due to the erratic debt strategy and lacking efforts towards fiscal soberness. Still, earlier this year, Zambia requested financial IMF emergency support to deal with the covid-19 impact. Discussions on a possible IMF Rapid Credit Facility (RCF) are ongoing.

In August, Zambia secured a debt service moratorium (from May to December 2020) from Paris Club creditors under the G20 Debt Service Suspension Initiative (DSSI). However, negotiations on DSSI implementations by Zambia’s major bilateral creditors – India and China – are ongoing. This temporary debt standstill allowed by bilateral official creditors should alleviate liquidity pressure for low-income countries. For Zambia, it could free up USD 140 million (0.6% of GDP) in 2020. Yet, given the gravity of Zambia’s financial situation, the initiative is likely to be extended, if not broadened.

During the period following the global financial crisis, bond issuances by African countries boomed, raising the importance of private creditors in the African debt picture. Yet, in today’s gloomy context, many (African) countries are reluctant to ask for debt relief from bondholders, as that could establish a formal default and hinder borrowing on bond markets in the future. Nevertheless, last week, the Zambian government requested a comparable debt service suspension from its commercial creditors and requested a six-month coupon standstill on its Eurobonds due in 2022, 2024 and 2027. A possible deal will be negotiated by a bondholder committee consisting of ten international financial institutions that hold about 40% of Zambia’s outstanding Eurobonds. The foreign bondholders might demand assurances of equal treatment with China before moving forward. As a major creditor, China’s willingness to restructure or cancel will be crucial, although there are still concerns about the actual scale of the debt Zambia owes to China.

Credendo classifies Zambia in the highest medium- to long-term political risk category 7/7 due to its weak financial position and derailed public finances. Fiscal breathing space through debt restructuring will be required to deal with the major challenges ahead and eventually return to a sustainable debt path. However, given Zambia's very complex creditor base, the debt restructuring negotiations are expected to take time, especially as it will be perceived as a precedent for other debt-strapped African governments.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com