Zambia: Eurobond - Zambia Now Edges Close to Debt Default

(file photo).
14 November 2020

Lusaka — Zambia's debt chokehold was tightened when bondholders rejected a request for some relief during a meeting.

This is according to a statement issued late Friday in Lusaka.

The southern African nation had until November 13 to convince holders of its $3 billion in Eurobonds to accept a six-month interest-payment holiday.

Vice President Inonge Wina was Friday quizzed if the country had that kind of money by opposition legislators all she could offer was an assurance that "Zambia was not ready to default."

In responding to incessant criticism by the opposition and civil society during commissioning of a fly over bridge, President Lungu frustratingly remarked "the country will continue borrowing if necessary."

"What is better, borrowing to transform the country; or not borrowing and doing nothing at all? It is from borrowing that we have managed to rebuild Lusaka."

A statement issued Friday night by the country's Finance Minister said;" While government regrets that the bondholders did not approve the requests made by Zambia in good faith, we remain committed to finding a consensual and collaborative resolution to debt sustainability issues."

"Further, we are confident that as government continues to share information with all creditors, including the committee's advisors, there will be an appreciation that agreeing to consensual standstills or accruing arrears are the only options available to the country while we design a plan to put our debt on a sustainable trajectory, "the statement added.

The government has contracted French firm Lazard Freres to advise on restructuring Zambia's $11.48 billion foreign debts that have threatened to become Africa's first sovereign default during the coronavirus pandemic.

In mid-October, Zambia got some debt servicing relief from China Development Bank, putting more pressure on private bondholders, although that seems not to be working in the country's favour given the latest development.

The Chinese state-owned lender agreed to defer interest due Oct. 25 for six months, and to reschedule the principal due by the same date over the life of the facility.

After news of the rejection by bondholders, local media quoted economists with one Chibamba Kanyama saying the outcome was anticipated.

"The question now is: will government pay the due amount or default?"

"However, put in context, and based on the Veep response in parliament today [Friday], the government will not default. It is in the interest of every citizen that the government pays and we should support that move," Mr. Kanyama was quoted as saying.

Several local economists and fund managers have cautioned on government's borrowing.

On ascending to power in 2011, the current Zambian administration embarked on a massive infrastructure drive.

It built schools, hospitals and upgraded its road network sometimes in places where that infrastructure never existed since Independence from Britain in 1964.That money was also spent on civil service pay.

To sustain that ambition, it borrowed and issued two Euro bonds that performed "exceptionally well."

As the incumbent President Lungu assumed power in 2015, in an election necessitated by the death of party founder Michael Sata after three years in power, that borrowing continued. Debt owed to foreigners tripled between 2014 and 2018 relative to GDP.

An estimated $12bn (51 per cent of GDP) of external debt on Zambia's books at the end of 2018, about 30 per cent was owed to China, 25 per cent to bondholders and 19 per cent to foreign banks. The World Bank, the IMF and Western governments hold a relatively small share.

According to analysis by the IMF and the World Bank there some loans that have been authorised but do not yet show up in official figures. These got to about $10bn in April 2019.

Zambia's "stock of external debt as at end 2019 was at US$11.97 billion but with the guaranteed debt for state owned enterprises came to US$13.55 billion.

Out of the huge sums borrowed, the country has seen infrastructure spring up in all places where none previously existed. Most key roads have been tarred making travelling relatively smooth.

That was enough to deduce that a plan for expending the money borrowed was clear but the question whether a payment scheme was put in place still looms large.

As the country heads to the 2021 general election, two bigger things were an albatross in the governing party's neck; the massive debt and the controversial eligibility of President Lungu.

This far the opposition were running to town with that theme that has become common place even for ordinary folk who seem to be already feeling the pinch and repeat opposition allegations the country's economy has been mismanaged.

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