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Govt admits possibility of defaulting on debt

GOVERNMENT has admitted it is likely to default on foreign debt if it fails to reach a favourable agreement with creditors.

And the Standard Bank, also trading as Stanbic Bank, says Zambia may need a longer standstill period than what government has asked for.

According to Bloomberg, Zambia’s Eurobonds slumped for a second day as the country appeared to be heading for a default amid a showdown with bondholders over its request for an interest payment holiday.

Zambia has asked holders of its $3 billion of Eurobonds to accept a six-month standstill on about $120 million of coupon payments while it works on a debt-restructuring strategy. The first, of $42.5 million, is due on Wednesday, though there is a 30-day grace period before the country is technically in default.

Bloomberg reports that Eurobond holders are due to meet on October 20 to vote on the proposal, and a group of holders already said they couldn’t vote in favour without further assurances and transparency from Zambia.

Rafael Molina, an adviser to the group, declined to comment on Wednesday.

“We have yet to receive enough details from Zambian officials to vote on the consent,” said Kevin Daly, investment director at Aberdeen Standard Investments, which owns Zambian bonds. “I think having a dialogue would be more constructive than issuing press releases.”

In a follow-up statement after finance minister Bwalya Ng’andu’s September 29 virtual meeting with creditors, Secretary to the Treasury Fredson Yamba said the situation remained unfavourable for the country.

Dr Ng’andu, in September, informed the world that Zambia’s debt stood at US $18.5 billion.

But the International Debt Statistics 2021, from the World Bank Group, portrays an external debt portfolio of $27 billion and gross domestic product (GDP) reduction from $25 billion last year to $18.2 billion this year.

Yamba said after the September meeting, creditors have continued asking questions on how the country would repay its huge debt.

“Should Zambia fail to reach an agreement with its commercial creditors (including holders of its

Eurobonds) on the terms of the appropriate standstills, as previously stated, the Republic with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulating arrears,” he said on Tuesday. “The debt service suspension period that the government is requesting will allow us to work, with the assistance of our financial and legal advisors, and in cooperation with the IMF, and all our creditors including the noteholders and their ad hoc committee to design a sustainable and equitable debt management strategy.”

He still attributed the situation to the coronavirus pandemic, although the country was already highly indebted long before the disease broke out.

Yamba, nevertheless, expressed hope that the creditors would agree to the government’s request to defer repayment.

‘’Our common objective will be to normalise our relationship with our valued financial partners as soon as circumstances allow and to orderly address Zambia’s debt challenges. We remain committed to ensuring equitable treatment of all our creditors and ensuring transparency in our engagements,’’ Yamba stated. ‘’Should the noteholders consent to the standstill, we will recognise interest accruing on deferred coupons in the restructuring process, at a rate to be determined in good faith with noteholders. The Government would like to take this opportunity to reiterate its strong desire and willingness to use this standstill to engage, with the assistance of its financial and legal advisors, in a collaborative and constructive dialogue with all its creditors to design a sustainable debt strategy in the weeks and months to come.”

But Standard Bank Group Africa reports that negotiations between the government and creditors could take longer than expected.

It states that this could translate into the country asking for a longer deferment period than the six months it has asked for.

“Our base case assumes that the potential IMF arrangement and debt restructuring negotiations will take longer to conclude than the government’s prescribed six-month timeline. This could necessitate an extension of the solicited standstill period,” Standard Bank Group states in part. “Moreover, an IMF deal will probably require the government to commit to clearing existing domestic arrears. Considering the government’s fragile fiscal position and its limited financing options, it would be interesting to see its strategy on clearing these arrears. Of course, it could put greater pressure on the BoZ (Bank of Zambia) to monetise a larger portion of the fiscal

deficit. Narrow money (M1) supply remains elevated, rising by 6.8 per cent m/m (month-on-month) and 38.2 per cent y/y (year-on-year)

in Aug.”

The Group also doubts the government’s ability to convince the IMF, going by its current poor economic record.

“The government still expects to drawdown on USD2.0 billion for capital projects between 2021

and 2023. Of course, this is significantly lower than the USD4.0 billion that the government initially planned. However, we question if this revision will be sufficient to bring public finances onto a more sustainable path, which we suspect will be a key consideration for the IMF,” the Report stated. “The government’s debt-to-GDP ratio of 112 per cent is significantly higher than the 35 per cent IMF threshold for the Net Present Value (NPV) of public and publicly guaranteed debt. This, combined with the government’s medium-term capital spending plans, could draw out negotiations with the IMF. Since we suspect that negotiations with external creditors and the IMF could become protracted, for now we are comfortable to remain underweight in the Zambia 24s in the SBAFSO index.”

The Group also stated that the government’s accumulation of arrears has been a key contributor to deterioration of asset quality in the banking sector.

It cited the proposed 2021 budget where the government has only allocated K2.8 billion to dismantling arrears.

“Arrears on external debt service is around 35 per cent of foreign exchange (FX) reserves, which reflects the government’s acute fiscal and external pressures. Recall, that the kwacha has depreciated by over 40 per cent this year and the Bank of Zambia is still trying to address FX liquidity

constraints. Notwithstanding the dollarization of mining taxes, FX reserves remain low at

USD1.43bn, which is equivalent to 2.3 months of import cover,” Standard Bank Group states further. “…Failure to secure debt service suspension in the near term, will increase the

probability that Zambia will default outright on other external debt commitments. We suspect that a suspension on all commercial, external debt service, rather than just for Eurobonds, would be more effective in addressing the sovereign’s fiscal and external challenges.”

The Group observed that it appeared government had concentrated more on repaying Eurobond debt than other debts.

“Hence, it is conceivable to believe that other external creditors may require the government to become current on its debt service, before engaging on a restructuring. Of course, this may prolong negotiations,” states the Group. “Notwithstanding the debt service deferment on concessional lending that the government has received from the Chinese government under the G20 Debt Service Suspension Initiative, we suspect a significant portion of Chinese lending to Zambia is commercial. The government is still negotiating with Chinese commercial lenders for debt service

suspension.”

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