Clock is ticking for Zambia on sovereign default

THE clock is ticking down on Africa’s first post-coronavirus sovereign default, as Eurobond holders wait to see whether Zambia will make an overdue debt payment on Friday while the government hopes creditors have granted it a payment deferral.

Zambia is due to pay a $42.5 million coupon on one of its $3bn dollar-denominated sovereign bonds when the 30-day grace period expires at the end of the day. The government has also scheduled meetings with creditors to hear whether they will grant the country a payment reprieve until April.

The Zambia external bondholder committee — a large group of creditors holding more than 40 percent across all Zambia’s bonds and a blocking stake in each issue — indicated it would reject the government’s plan, citing a lack of transparency and communication.

‘Investors are really miffed that Zambia had three years to go to the International Monetary Fund (IMF) and get some funds, but refused to let it into the country to avoid painful reforms,’ said Lutz Röhmeyer, chief investment officer at Capitulum Asset Management, who voted to support the payment deferral but is not part of the group.

The government said it is doing everything possible to avoid a sovereign debt default, though it has also pledged to seek similar terms from all its external creditors on debt service suspension.

Zambia’s finance ministry did not immediately respond to a request for comment.

If Zambia is not granted a payment deferral and does not pay its coupon, it would be classified as a default on its three outstanding Eurobonds with a face value of $3bn.

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 percrnt of GDP, by the end of 2014. Five years later, it had more than doubled to $11.2bn, or 48 percent of GDP.

The IMF predicts a rise to nearly 70 percent by year’s end.

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. Zambia’s dollar bonds are trading between 45c and 47c 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.

‘African countries need to come to some resolution quickly in order for them to also deal with other pressing health and economic issues that Covid-19 has exacerbated,’ said Jacqueline Musiitwa, managing partner at Hoja Law Group.

‘Right now, there just needs to be more transparency in general to make sure that Africa finds a solution, not only for the short term but also for the long term.’

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