Commentary on Political Economy

Tuesday 22 September 2020



Zambia headed for Africa’s first Covid-related debt default

President Edgar Lungu’s government is seeking the suspension of debt service payments for a period of six months from holders of its $3bn worth of international bonds © REUTERS

Zambia has asked investors in its US dollar bonds to accept delays in their interest payments into next year, in what would be the first African debt default on private creditors since the pandemic.

President Edgar Lungu’s government said on Tuesday that it was seeking “the suspension of debt service payments for a period of six months” from holders of its $3bn worth of international bonds, beginning in October.

The country first tapped international bond markets in 2012, at a time when its fast-growing economy and investors’ hunger for high-yielding dollar assets allowed it to borrow more cheaply than Spain. Further sales followed in 2014 and 2015 amid a post-financial crisis boom for bond issuance by African governments.

But Tuesday’s proposal leaves investors — including holders of that original $750m 10-year bond — facing losses.

Even before the pandemic hit the continent, Africa’s second-biggest copper producer was battling to control $11bn of debts, a large part of which is also owed to China.

It signalled earlier this year that it was seeking a bond restructuring as part of a quest for a loan from the IMF and other debt relief.

On Tuesday Mr Lungu’s government blamed “a combination of declining revenues and increased unbudgeted costs caused by the Covid-19 pandemic” for the need to stop payments. 

Pandemic costs “resulted in a material impact on the government’s available resources to make timely payments on its indebtedness leading to increasing debt servicing difficulties”, it added. Zambia has recorded about 14,000 cases and slightly more than 300 deaths from the pandemic to date.

Prices of Zambia’s three dollar-denominated bonds, which were already trading at distressed levels, dropped by up to 3 per cent after the government proposed the standstill from mid-October until mid-April — a period covering three coupon payments. The fall left the bonds trading at about 53 cents on the dollar.

The six-month freeze “is tantamount to default”, said Kevin Daly, a fund manager at Aberdeen Standard Investments who holds a small amount of Zambian debt.

Mr Daly said investors had been bracing themselves for a potential default since April, when the government called in advisers to help it plan a restructuring of the debt. “This is not a bolt from the blue, which is why we’re not seeing the bottom fall out of the market,” he added.

The government has scheduled a call with investors on September 29 to discuss its proposal. 

Two-thirds of bondholders have to consent to the deferral of interest payments for the plan to go through.

Zambia had already secured the temporary suspension of payments to some official creditors until the end of the year, under a special scheme for relief in the pandemic.

The country is yet to agree a loan from the IMF, which has said that it must tackle its unsustainable debts taken on over the past decade to finance an infrastructure boom before the economy slowed.

Analysts have said that Mr Lungu is also reluctant to sign up to IMF-mandated belt-tightening before elections next year.

Zambia’s economy formerly had one of the fastest growth rates on the continent but investors have grown wary of erratic rule under Mr Lungu, including disputes with mining companies. Last month Mr Lungu also abruptly sacked the governor of the central bank.

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