ZAMBIA AT RISK OF DEFAULTING ON FOREIGN DEBT, FINANCE MINISTER SAYS

Fri 13 November 2020:

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.

Zambia is on the brink of defaulting on its foreign debt after it missed a payment of more than $40m (£30m) last month.

A so-called grace period will expire on Friday, which would make it Africa’s first country to default on sovereign debt since the coronavirus pandemic.

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

The pandemic has put an additional burden on health services and depressed economic activity and the government has said that is the cause of its difficulties.

But critics have blamed President Edgar Lungu’s poor economic management and there have been concerns about corruption in recent years.

“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.

The Zambia External Bondholder Committee – a large group of creditors holding more than 40 percent across Zambia’s bonds and a blocking stake in each issue – had already indicated it would reject the government’s plan, citing a lack of transparency and communication.

If Zambia does not pay its coupon, it will be classified as a default on its three outstanding Eurobonds with a face value of $3bn.

Zambia’s dollar bonds traded about half a cent on the 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.

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.

“The position of government is that we have to treat all the creditors equally,” Ng’andu said. “We are continuing with engagement with the bondholders through our advisers, and we hope that the process of engagement will lead to some solution along the way.”

The minister said Zambia’s negotiations with the International Monetary Fund were also continuing. He declined to give further details.

Referring to a deal agreed with the China Development Bank last month, he said the bank had given a six-month grace period on interest payments and a three-year grace period on the principal payments for one loan. Ng’andu did not reveal the size of that loan.

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

Data from Lusaka showed that Zambia’s total external debt stock stood at $4.8bn, or 18 percent of the gross domestic product (GDP), by the end of 2014. Five years later, it had more than doubled to $11.2bn, or 48 percent of the GDP. The IMF predicts a rise to nearly 70 percent by the yearend.

The Eurobonds are not its only debt. Zambia owes some $3.5bn in bilateral debt, $2.1bn to multilaterals and $2.9bn to other commercial lenders. It owes about $3bn to China and Chinese entities.

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

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