Eurasia Sees Zambia Default Risk Rising as IMF Loan Talks Stall

(Bloomberg) -- Zambia’s currency extended its decline to a four-month low against the dollar and its Eurobond yields soared as loan talks with the International Monetary Fund stalled amid concern the country is under-reporting its external debt.

The kwacha weakened 0.8 percent to 10.034 per dollar Friday, bringing its decline in the past two weeks to 5.9 percent. Yields on $1.25 billion of 2027 Eurobonds climbed 12 basis points to 9.43 percent, the highest since December 2016. The yield has surged 246 basis points from a record low in January.

Eurasia Sees Zambia Default Risk Rising as IMF Loan Talks Stall

Negotiations with the IMF over a long-delayed $1.3 billion loan are unlikely to produce a deal before the end of the year, Ty McCormick, an Africa analyst at Eurasia Group, wrote in a client note dated May 3.

Here are some of Eurasia’s views on Zambia:

  • “External debt is likely higher than the official $8.7 billion figure; a planned review of the situation has been delayed and the results may not be made public”
  • “The risk of default is low in 2018, but will increase substantially in 2019 and 2020 absent a concerted effort to cut spending” and an IMF program
  • “President Edgar Lungu’s cash-strapped government has resisted the IMF’s calls to rein in spending. Lungu will probably continue to borrow and spend in the lead up to the election” in 2021
  • Debt figures “will likely be revised upward after the Finance Ministry completes its debt sustainability analysis,” expected in June
    • “Nonetheless, this is not a Mozambique-style ‘hidden debt’ situation;” rather a “breakdown” of the debt-tracking process as individual ministries and parastals secured project financing
  • “Rising copper prices will provide a small cushion in the short term, but the government remains highly vulnerable to external shocks such as a slump in commodity prices or a drought that dents hydropower production and in turn hurts the mining sector”

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