Global conditions tough for Zambia’s Eurobond refinancing, cautions WB

THE World Bank has said Zambia’s current conditions for market access are unfavourable.

And Zambia Institute for Policy Analysis and Research (ZIPAR) senior research fellow Caesar Cheelo says the PF government’s propensity to spend has not resulted into robust economic growth.

Meanwhile, Ministry of Finance permanent secretary in charge of economic management and finance Mukuli Chikuba has noted that debt re-financing is not peculiar to Zambia.

During a public discussion themed “Zambia’s debt situation: What’s the best way forward” at Hotel InterContinental in Lusaka on Thursday night, World Bank senior economist Dr Zivanemoyo Chinzara cautioned that global conditions for financing were “quite tough” for refinancing of the country’s Eurobonds.

“In terms of re-financing, if the Euro bonds were to be re-financed today, the global financing conditions are quite tough at the moment. So the global conditions are quite unfavourable because the cost of borrowing globally, for any country I guess, has gone up compared to say [in] 2015 when the third Euro bond was issued. Conditions at the moment are not also favourable for Zambia – if you look at the copper prices…investors probably look at the growth prospects and copper [price] is one the indicators. Copper did well between September 2016… The entire of 2017 [and] 2018 it was going up,” Dr Chinzara explained in a packed auditorium.
“But since June [2018], we’ve seen copper prices decreasing. At the beginning of the year, we projected copper prices to be very strong in 2018, to keep on increasing. But we’ve seen [that] since they (prices) reached the peak in June, they’ve been declining and part of the reason is geopolitics – issues between the US and China. So copper prices haven’t been doing well. But I was discussing with some of the market participants who follow copper prices quite closely and they were telling me that they expect demand for copper to be high and [that] global supply is probably, in the medium-term, expected to be short. So maybe they (copper prices) will pick up in the future…”

He added that “the spread of the Euro bond” could also affect the cost at which Zambia could access credit.

“The exchange rate has been quite stable, so it’s a positive. But of course the risk to the stability would be affected by…and if copper prices don’t recover [quickly.] But if copper prices recover, the exchange rate may remain stable,” said Dr Chinzara, adding that the sovereign rating, which was also a determinant of the cost at which the country could access the international market, was not as favourable as it was in 2012, 2014 or in 2015.
“So, in summary, as it stands today, Zambia’s conditions for market access are not very favourable. But of course, some of these conditions, Zambia can change them but some cannot be changed. For example, Zambia cannot have control over copper prices, cannot control global interest rates….”

Dr Chinzara’s economic account focused on restructuring commercial debt under unfavourable market conditions: World Bank experience in Africa.

And Cheelo, who started by defining debt restructuring or refinancing, was concerned about the mismatch between government expenditure and economic growth in the country.

“Debt restructuring is basically a term that is used usually when a country or an economy is facing debt distress. But because this term [of] debt distress sometimes sends wrong signals to the market, people tend to refrain from using ‘restructuring’. So the usual nomenclature is to look at debt refinancing… One aspect why a country might want to refinance [a debt] is to change or improve the structure of interest payments. So if you feel like the interest payments are too heavy on an economy and you have a strong negotiation, you might go back to the market and negotiate better terms. For example, Zambia borrows US$750 million in 2012 for a period of 10 years; the interest payment is the equivalent of the principal amount, US$750 million. So total payout at the end would be US $1.5 billion,” Cheelo explained.

He, however, pointed out that when one compared real growth in the national budget to real growth in the GDP, “you notice that there has been a flip”.

“From 2002 to 2011, growth in our annual budget was only 2.1 per cent. This is comparable over time and across the two variables. So it was 2.1 per cent per annum on average in that period. The growth in the budget has escalated or increased. So appetite for spending in Zambia between 2012 and 2018 is now at 10.2 per cent per year! So, that’s how fast your spending is growing. On the other side, our GDP growth, which used to be about 7.5 per cent on average per year between 2002 and 2011, is now [at] 4.5 per cent. This doesn’t take into account the adjustments that have recently been made by CSO (Central Statistical Office). So, this figure of 4.5 per cent might take a slight downward adjustment. But the point here is that it seems that our propensity to spend has not resulted in robust growth. So we really need to check where the mismatch has been between government expenditure and economic growth in the country,” said Cheelo.

Chikuba, another panelist, seized the opportunity to explain some economic ‘benefits’ that have come as a result of austerity measures, as announced by finance minister Margaret Mwanakatwe on June 14.

Mwanakatwe, in a press statement, announced that President Edgar Lungu had ordered cancellation of some existing loans, banned the issuance of letters of credit and guarantees to State-owned enterprises, terminated financing of development projects that were below 80 per cent completion and cut down on ministerial travels with immediate effect.
She stressed also that nobody but her was mandated by law to sign any form of loan agreement on behalf of Zambia and further banned all government officials from making public statements on economic matters and debt contraction, going forward.

“…for 2018, if we did nothing like postponing some of the borrowing and cancelling some of the loans… We expected that the deficit will be [in the range] of nine per cent. But with the work that has been done this far, in the last few weeks, the deficit for 2018 is now projected at 7.4 per cent of GDP, slightly lower than the 7.8 per cent that was recorded last year. So these are some of the results that are coming out of the [austerity] measures that were announced by the minister. Suffice to say that on the expenditure side there were some measures that we were implementing – there are some that we are implementing on the revenue side. Most of these measures will have an impact over the medium term; it might not be immediate in 2018. Over the medium term, we are currently putting up medium-term expenditure [plan]….” Chikuba explained.

He then shared some reflections on Euro bond refinancing.

“This is another topic or issue that has been in public domain. The first Eurobond is coming due in 2022 and government…. We have started giving thought on what to do to the Eurobond and so far, what we have done is [to] come up with a Eurobond redemption strategy and this strategy was finalised a few weeks ago. The Eurobond refinancing strategy gives an array of options… We are starting this year; we want to ensure that the Sinking Fund is operational with $20 million. But over the medium term, as we are putting up the medium-term expenditure… this will be released to the public pretty soon, in the next few weeks and you will see how we have positioned that we build this Sinking Fund,” said Chikuba.
“The refinancing option is not peculiar to Zambia. Countries like Kenya, Ghana, Senegal, in the recent past, have re-issued their Eurobonds at longer tenures. In Kenya actually they did a 30-year one from 10 years to give themselves room to meet the obligations. There are some questions that are asked that ‘why the refinancing of Eurobonds?’ When we were issuing the Eurobonds on the international capital market, we had two main objectives. The first objective was to finance capital expenditure and the second objective was to have an instrument in the market that is a barometer for the way the economy is performing and what we are doing. So for the second reason particularly, one would want a Eurobond to be outstanding all the time on the market. So, what it does is that it gives you a profile in terms of the risk that a country is distressing.”

Jesuit Centre for Theological Reflections (JCTR) programmes officer Geoffrey Chongo, who was also on the panel, said the government ought to find a sustainable way to repay debts, instead of “putting more pressure on ordinary Zambians” by over-taxing them.

“We agree with government that refinancing or debt restructuring is necessary. [But] we’ve seen already government introducing a number of taxes that are creating a huge burden on ordinary Zambians. Government has to survive but we too have to survive as citizens. We certainly agree with government that we need to come up with sustainable ways of addressing the debt situation rather than putting more pressure on ordinary Zambians,” said Chongo.
“There is a caveat to our agreeing with government to refinance debt; there are certain cases where refinancing has actually resulted in economic growth, reduction of poverty and inequality because it gives the government room to attend to domestic needs as it repays debt. But the first thing we are worried of is the cost of refinancing…. If the cost of refinancing will be higher than the cost of the current Eurobond, we are then postponing the problem. Our last concern [is that] refinancing may delay the necessary reforms that we need to implement for us as a country to effectively address the problem of debt. So, we need transparency in the way we are going to refinance.”

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