As Zambia embarks on an attempt to restructure billions of dollars in debt, investors are watching closely to assess whether distressed emerging market economies, weakened by the coronavirus crisis, will be able to negotiate deals with creditors.
Before the pandemic, Africa’s second-biggest copper producer had consistently deflected long-running concerns over the rapid growth of its $11bn external debt and the large share, or about one-third, that is owed to China.
But the appointment last week of the investment bank Lazard to advise President Edgar Lungu’s government on “liability management” has signalled that a restructuring is on the way.
After Argentina defaulted last month in the middle of negotiations with its bondholders, Zambia’s ability to fix what Bwalya Ng’andu, the finance minister, has called the country’s “over-ambition in terms of borrowing” is seen as the next big test of a sovereign borrower’s response to the pandemic.
“I hope that Zambia doesn’t waste a good crisis here, ” said Kevin Daly, a portfolio manager at Aberdeen Asset Management and a holder of the country’s bonds.
Zambia’s annual debt obligations are much lower than Argentina and Lebanon — both also receiving advice from Lazard — meaning restructuring negotiations should be easier, Mr Daly said. But the country’s unsustainable debts have long blocked it from receiving loans and oversight from the IMF that leave it more vulnerable, he added.
Even before the pandemic, the government was struggling to keep up with payments on its Chinese loans and US dollar bonds, which each represent roughly a third of Zambia’s external debt. Previously high rates of economic growth had slowed as Mr Lungu’s rule had become increasingly erratic.
The situation has worsened since the global coronavirus slowdown. Prices for copper, Zambia’s main export, have fallen, leading to a collapse in the value of the Zambia kwacha and the further erosion of its foreign reserves, making US dollar debts even harder to bear.
Both kinds of debt lie outside the Paris Club of bilateral government creditors that have traditionally led debt relief for poorer nations. Much of the Chinese borrowing is tied to opaque infrastructure projects of uncertain value.
This will complicate the restructuring talks, according to Trevor Simumba, a Zambian analyst who has investigated the country’s borrowing.
“If they are going to undertake a real debt restructuring, they need the Chinese at the table,” Mr Simumba said.
China has previously signalled that it was willing to talk to low-income countries individually about their debt challenges. But Mr Simumba said there was still no clear sign of an offer of debt relief from Beijing, adding that the finance ministry must still work out exactly what is owed. “They don’t have the full details of their indebtedness to China. A lot of the debt has been acquired directly by the spending ministries.”
Zambia’s repayments to creditors outside the Paris Club surged by more than 1,300 per cent between 2012 and 2019 to about $600m last year, according to figures compiled by the Zambia-focused Institute for Research and Analysis.
Last year it made $143m in debt payments to China ExIm Bank, one of its largest creditors, which has funded high-profile airport and road-building projects, up from $23m in 2012.
“Chinese debt has clearly pushed this country over the edge,” said Mr Daly at Aberdeen Asset Management. Limiting further any drawdowns from Chinese loans that have already been contracted “will be a line in the sand” in a debt restructuring, he added.
Another solution might have been to secure IMF assistance. Several African nations, including Ghana, Kenya and Nigeria, have tapped the fund for emergency financing to deal with the effects of the pandemic.
But the IMF has said countries with already unsustainable debt levels before the crisis, such as Zambia, must first engage creditors to show debts can be managed before it will consider new assistance.
Even if Zambia does secure a deal with its creditors, Mr Lungu might prefer “delaying tactics” to avoid agreeing to an IMF package before national elections next year, said Mr Simumba, the debt analyst. Mr Lungu is seeking re-election and, as political tensions rise, opposition politicians have accused the ruling party of using the debt-funded projects to buy support with associated procurement contracts.
“The election that is coming is going to be very tight. If you have an IMF programme, you can’t throw sweets around,” he said.
The government denies the allegations. A spokesperson for Mr Lungu did not respond to a request for comment.
While bondholders and investors are bracing themselves for debt talks, Mr Simumba said he was most worried by what would happen if Zambia’s coronavirus outbreak worsened while the country did not have recourse to an IMF backstop.
“The people who are going to be affected are the poor and the vulnerable,” he said.
