EIU doubts possible IMF deal for Zambia in 2018


THE Economics Intelligence Unit (EIU) says Zambia’s effort to refinance US $2.8 billion Eurobond stock by 2019 is unlikely with the country’s sovereign rating at junk status.


And Stanbic Bank predicts that stable exchange rates and subdued inflation could signal a drop in interests by the Bank of Zambia in the first half of this year.


The EIU Zambia Country Report dated February 6 stated that even refinancing the Eurobond stock in a smaller amount might again be postponed beyond 2019.


“Zambia intends to refinance US $2.8 billion in Eurobonds in 2019, according to Mukuli Chikuba, the Ministry of Finance’s permanent secretary. Analysis: The government made identical claims in late 2016 but was warned of refinancing its Eurobond debt – which totals US $3 billion by the IMF as financing conditions were deemed unsuitable; copper prices were low and the budget deficit including arrears for that year was, at that point, officially estimated at 10 per cent of GDP,”

the EIU report stated.

“As then, the motivation behind an early rollover (the first Eurobond in the current stock matures in 2022) is to reduce high servicing costs; external debt payments make up around 10 per cent of total expenditure in the 2018 (calendar year) budget, despite the kwacha having stabilised from a period of free-fall in recent years.

Affordably raising US $2.8 billion in one year is unlikely with Zambia’s sovereign rating at junk status, and even refinancing a smaller amount may again be postponed beyond 2019.”


The EIU adds that as a virtual precondition to a successful bond issuance, Zambia would first need to demonstrate a focused commitment to rebalancing the fiscal account.


The EIU quotes Chikuba as saying that Zambia expected a loan facility with the IMF, which the government was currently in negotiations for, to be struck in 2019 as opposed to 2018, which the government was hoping for.


“But the timeline between getting a deal with the Fund, making concrete progress on strengthening the public finances and issuing Eurobonds all in one year will be tight. Not only that, but by 2019 we expect US monetary tightening to peak, with the Federal Reserve (the US central bank) possibly raising its discount rate to as high as three per cent given that Zambia’s three Eurobonds were issued during super-lax financing conditions, this will make undercutting yields on the existing stock difficult, even if just a fraction of the US $2.8 billion is actually floated. And with the first Eurobond still a while away from maturity in 2019 there is nothing time-wise forcing the government into making decisions that could backfire. By 2020, we expect the contractionary monetary cycle in the US to be reversed, by which time Zambia will be in a better position to tap sovereign debt markets,”

the EIU report stated.


Meanwhile, Stanbic Bank says Zambia continued to borrow heavily from the domestic market and had increased securities issuance in 2018.


The bank adds that the lack of an IMF deal continued to play on the market.

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