Bondholders Facing Zambia Haircut Cast Wary Eyes Over Africa
Bondholders Facing Zambia Haircut Cast Wary Eyes Over Africa
Bondholders are facing “significant losses” as Zambia battles to bring its debt under control, according to Moody’s Investors Service. They’re now asking: who’s next?
The southern African country this week asked for a six-month interest-payment holiday to give it “breathing space” for a debt restructuring, a move that may buy it time but won’t do anything to solve its longer-term debt problems, Moody’s said.
In his budget speech on Friday, Finance Minister Bwalya Ng’andu had little new to offer, except a slightly smaller-than-expected fiscal deficit that it plans to fund through more, not less, external borrowing. He didn’t mention the International Monetary Fund, which the government had approached for emergency funding, or offer further details on the debt-restructuring strategy.
Though Zambia has been borrowing with abandon for years, its problems stem in part from falling commodity prices and an exodus of capital triggered by the coronavirus pandemic. Now, its weakening currency has increased the cost of servicing and repaying billions of dollars of debt raised from bondholders and Chinese banks. Other African nations face similar problems, with more than a third at risk of debt distress, according to the IMF.
- Angola, which has negotiated $6 billion in debt relief with some of its lenders, told the IMF it may seek respite from a wider group of creditors if oil prices fall further.
- Chad has asked the world’s largest commodities trader, Glencore Plc, and other private creditors to delay debt payments under a global push for debt.
- Kenya said it’s at risk of debt distress as external borrowing costs rise faster than foreign revenue.
While none of those countries is at immediate risk of a default, countries may find it difficult to meet interest payments on their Eurobonds while also servicing large debts with bilateral lenders.
“Zambia is more the exception than the rule at this point; many other sub-Saharan African countries are experiencing problems under Covid, and sought official-sector relief, but have avoided touching the bonds,” said Stuart Culverhouse, head of fixed-income research at Tellimer Ltd. in London. “Where Zambia may set a precedent is that for countries more obviously in distress, and seeking debt-service relief, perhaps the official sector will be more emboldened to push them to seek private sector restructuring too.”
Group of Seven countries last week backed an extension of a freeze in debt payments from the world’s poorest nations struggling with Covid-19, while signaling criticism for China for failing to fully participate.
The support of the club of industrialized economies signals a growing consensus within the Group of 20, a wider body that includes China. But the countries underlined the need for members that aren’t part of the Paris Club group of creditors to fully participate in the debt relief, a comment likely aimed at the Asian nation. That means private creditors may also be drawn into debt-relief talks, according to Anne Fruhauf, managing director at advisory company Teneo in Mexico City.
“If 20 years ago resolving Africa’s debt problem largely hinged on Paris Club creditors, the changing composition of debt means there can be no comprehensive solution without private creditors or non-Paris Club creditors, principally China,” Fruhauf said.
For now, eyes are on Zambia, which last month secured an eight-month debt freeze from some official lenders. As part of this accord, the government was also obliged to seek comparable terms with commercial lenders, according to Mukuli Chikuba, permanent secretary at the finance ministry.
“The Zambian government has indicated its commitment to find a collaborative resolution to its debt sustainability challenges,” Moody’s said in a note on Friday. However, with the country’s debt burden set to reach 110% of gross domestic product this year, “placing debt on a sustainable trajectory will invariably result in large losses to commercial creditors,” Moody’s said.
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