Zambia's `Unknown' Debts Face Scrutiny After Mozambique Scandal

(Bloomberg) -- Zambia is facing tough questions over its foreign-debt levels from investors who think the real number may be more than double what the government says it is.

Lenders including Nomura Holdings Inc. believe the state hasn’t come completely clean on how much external borrowing it’s undertaken. This is raising concern the southern African nation may be headed for a similar situation to neighboring Mozambique, where hidden debts led to default and the government is seeking to restructure.

“Zambia is in somewhat of a serious predicament of having politically connected additional ‘unknown’ loans,” Peter Attard Montalto, head of emerging Europe, Middle East and Africa economics at Nomura International in London, said in an emailed note March 27. “The hidden-loan problem, in our view, is likely one of short-term external debt that is at least as big as known external loans and external bonds combined.”

For Zambia, Africa’s second-biggest copper producer, external debt is key. It’s been the main stumbling block in sealing a $1.3 billion loan from the International Monetary Fund it needs to bolster foreign-exchange reserves that fell to a seven-year low in November. The government has been on an infrastructure-spending spree over the past five years. That’s seen external loans soar to $8.7 billion at the end of December from $2 billion in 2011.

Already, it’s feeling the strain. The government wants to restructure Chinese state-backed loans, and now also wants to “reprofile” the $3 billion in Eurobonds it borrowed between 2012 and 2015, Finance Minister Margaret Mwanakatwe told reporters Friday in Lusaka, the capital. Her department will in two weeks complete a detailed debt-sustainability exercise, she said.

“Only government knows its level of debt, and government then shares that with the public,” Mwanakatwe said when asked about speculation that Zambia’s debt may be higher than what government said it is. “I’ll be doing that on a quarterly basis.”

Even then, the state doesn’t seem to be so sure. At Friday’s briefing, Mwanakatwe originally said the external-debt figure was $8.9 billion then later corrected it to $8.7 billion. And in June, her predecessor, Felix Mutati, told parliament it had increased to $17.2 billion -- he later corrected himself, saying the actual figure was $10 billion lower.

The rapid increase in external debt has put Zambia at high risk of debt distress, the IMF said in October. The bulk of new loans, besides the Eurobonds, has come from China and is going toward building new infrastructure including roads and airports. Contractor-financed projects with no clear tendering processes increased their costs, according to the African Development Bank.

Independent Audit

The IMF has requested that Zambia’s government undertakes an independent audit of its foreign debt, according to Attard Montalto. Alfredo Baldini, the fund’s resident representative in Lusaka, didn’t immediately respond to emailed questions.

Still, there is no concrete proof that Zambia has “unknown” loans, Gregory Smith, a sovereign-debt strategist at Renaissance Capital in London, said in a note to clients Thursday.

“Since Mozambique’s hidden debts became apparent, there has been concern about where else this might happen,” said Smith, who previously was an economist with the World Bank in Lusaka. “Zambia has been singled out as a potential source of hidden debt. But there is no hard evidence to suggest the probability is higher there than for other sovereigns of similar credit ratings.”

Mwanakatwe, who was named finance minister in February, will meet with investors in London later this month and will hold a non-deal roadshow in May.

©2018 Bloomberg L.P.