September 22, 2020


ZAMBIA: Dragging private bondholders into debt service suspension

BY Anne Frühauf

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The ministry of finance today, 22 September, announced a consent solicitation “to request the suspension of debt service payments for a period of six months from 14 October.” The suspension would apply to three Eurobonds worth USD 2bn maturing in 2022, 2024 and 2027. This would affect forthcoming coupon payments due on 14 October, 30 January 2021 and 20 March 2021. An investor meeting to be convened by the ministry of finance on 29 September at 12:30 (GMT) will surely be heated. While the G20 Debt Service Suspension Initiative (DSSI) covering bilateral debt did call on private creditors to participate on “comparable terms,” Zambia is the first country in the region to try to force bondholders’ hands. Consequently, the government’s next moves will likely be closely scrutinized as a potential bellwether for other sub-Saharan African sovereigns.

The finance ministry justified its request for a payment holiday with “a very challenging macroeconomic and fiscal situation aggravated by the Covid-19 crisis.” As discussed previously, it was always clear that Zambia headed into the Covid-19 pandemic on extremely weak financial footing. Indeed, a debt crunch already seemed inevitable even without the pandemic-induced shock towards the mid-2020s (see graphic below).

Zambia’s position has been exacerbated by President Edgar Lungu’s reluctance to cut a deal with the International Monetary Fund (IMF) ahead of elections next year. Today’s statement does pay lip service to engaging with the IMF around a program of reforms and Finance Minister Bwalya Ng’andu has sought to rekindle relations via a request for a funded program in February, but continued electorally vital borrowing and Lungu’s recent central bank heist will be major obstacles. For now, the best hope is probably disbursements under the IMF’s Rapid Financing Instruments (RFI) and Rapid Credit Facilities (RCF) that are light on conditionalities, but speculation could increase once again that – with its back to the wall – Zambia is fast running out of all other options.

Today’s announcement will raise questions over the treatment of different lenders. Until recently, the government had firmly prioritized Eurobond payments over all other creditors, even as payment delays on project contracts and bilateral debt had already worsened throughout 2019. Nevertheless, the government’s announcement in late March of its plan to restructure USD 11.2bn worth of external debt had underscored the depth of sovereign’s financial crunch.

Another question that will come under fresh scrutiny is Chinese debt and participation in the DSSI. As Zambia’s largest bilateral lender, reprofiling of bilateral debt is vital. Yet judging by developments to date, any debt relief or deferrals will be slow in the making and may involve painstaking contract-by-contract negotiations. Some bondholders have argued that debt to China must be fully reprofiled before Eurobonds restructuring is concluded, but the latest developments suggest they could be disappointed.

This is the first time that an African country participating in the G20’s DSSI is requesting “a similar debt service suspension from its commercial creditors,” which could fuel market anxiety about whether Zambia could become a trendsetter in a region carrying an increasingly unsustainable debt burden. Some sovereigns accompanied their DSSI applications with specific assertions that they do not intend to seek comparable treatment from private creditors, but Zambia’s move could potentially stir concerns over similar credit events elsewhere.

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