Since coming into power in September 2011, the Patriotic Front government has embarked on one of the most ambitious borrowing sprees in recent history, cashing in on its reputation for stability and offering investors to own a piece of its copper exports-led growth. But as more and more local governments and state-owned companies issue bonds, some analysts are citing risks of overexposure.
The borrowing spree is anchored by the successful issue of a 10-year Eurobond raising $750 million, which was originally put in motion by the previous MMD government of Rupiah Banda. It was followed by a road show from Zambia's public utility Zesco, which is seeking to raise a staggering $2 billion from foreign investors, with the aim of decreasing the frequent load shedding and blackouts which have especially had an impact on mining operations. According to Managing Director Cyprian Chitundu, Zesco's management team has already visited London, talked to investors in Boston on Nov. 29, and ended with meetings in New York on Nov. 30.
Although Zambia is rated by Moody's as B1, when bonds were issued by South Africa's Eskom Holdings, which is ranked much higher, they were able to raise a maximum of $1.75 billion. The idea that the much lower ranked public utility could surpass this amount is doubtful.
The Zesco borrowing was followed by an announcement by the Lusaka City Council to issue bonds to raise $500 million, tapping into the seemingly endless appetite for Africa risk in order to fund the construction of some 3,500 new flats to alleviate the housing crisis in the Zambian capital. Deputy Finance Minister Miles Sampa has also said that the city councils of Livingstone and Solwezi, which would make Zambia only the third country in Africa to have issued them outside of regional titans South Africa and Nigeria.
But here is where the problems begin, as there are serious doubts about the ability of these local government organisations to guarantee future revenue streams.
According to the blog Zambian Economist, "Future revenue is not guaranteed for many reasons including corruption, mismanagement and general failure by tenants to pay back debts. So we can expect, this new LCC bond to be guaranteed by Government in some way. Government will eventually bailout Lusaka City Council due to rampant fiscal irresponsibility."
So why so many bonds so quickly? It is actually not the case that Zambia's economy is doing so well that every investor wants exposure, but rather the oversubscription to the Eurobond was due to outside factors and a unique investment product offering. However, many Zambian government officials have mistook the Eurobond as an unexpected windfall of investor appetite.
One international economist interviewed by the Financial Times commented, "The recent sovereign issue was seen as such a success here that many parties are seeking to emulate it. The problem is, the general perception here is that this success must be the result of Zambia's economy doing well, not a reflection of global trends."
In the current Zambian context with weak regulatory oversight on debt management instruments, there are many reasons to be concerned about future credit ratings when many of the entities doing the borrowing are known for wildly irresponsible fiscal management.