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Zambian Debt Crisis – the Past, Present and Future


By Adithya Puravankara, Thomas Geller, Andrew Lee, Mouneil Sethi and Pranit Dutta at the LSE Trading Society


Introduction to the Zambian Tragedy

The Covid-19 pandemic has hammered emerging markets throughout the world with many

nations expecting to default on their debt repayments, Zambia seems to be one of the first in

line by defaulting on coupon payments for $3 billion worth of debt. The Zambian tragedy is

reminiscent of past emerging-market defaults with government corruption, foreign debt

holders, collapse in the price of main revenue earners (in Zambia’s case: Copper) but now

includes the added difficulty of a worldwide economic downturn brought about by a

contagious virus. 


Zambia’s debt story began in 2012 with a push for investments in large infrastructure projects

such as roads, energy and rail with a bulk of the financing coming from China but also

sizable loans from development banks and the commercial Eurobond market. Bonds issued

by Zambia were attractive considering the fast-growing economy, low national debt levels (at

the time only 22% of GDP) as well as competitive coupon rates. Fast-forward to 2020,

widening fiscal deficits, the steady decline of copper prices over the last 10 years (which

constitutes 80% of Zambian exports) and a string of corruption scandals has meant the promise of healthy returns has turned into a negotiation nightmare for bondholders. 


China’s involvement in Zambian debt and its implications

China is the single largest creditor and a major provider of finance for development in

Zambia, with ExIm Bank of China and China Development Bank lending over $3 billion for

infrastructure projects into roads, energy, railway and telecom sectors. China has lent

liberally to many developing countries in recent years, especially in Sub-Saharan Africa with

limited transparency about the real extent of the lending and the conditions of the loans. 


The Chinese government has declined to join the Paris Club where countries can restructure

bilateral debts and despite Government denial, the existence of "hidden loans" are not ruled out, leading to accusations of Chinese debt-trap diplomacy. Although Zambia has already

begun restructuring, renegotiating or refinancing its extensive Chinese project finance debt,

the evidence suggests that Chinese patience is wearing thin.


Chinese companies are putting pressure on the Zambian Ministry of Finance to avert further

delayed payments or defaults on their loans; however, many are refusing to restructure

existing debts and instead seeking collateral in case of default. Many reports suggest Chinese

firms are hoping to capitalise on the liquidation of Zambian copper mines as part of Zambia’s

debt relief programme. 


Coronavirus and its implications on Zambia’s current situation

The Covid-19 pandemic has sent shocks throughout the global economy. In Zambia’s case,

the fall in global demand for copper, its main export, resulted in lower prices for copper. This

adversely affected the value of the Zambian kwacha and further eroded the nation’s foreign

reserves – ultimately making US dollar debts harder to bear. 


While other neighbouring African nations, like Rwanda and Senegal, have turned towards the

IMF for financial assistance to deal with the immediate effects of the pandemic, this option is

not available for Zambia. For several years, the Zambian government has had 'frosty'

relations with the IMF. As a result, Zambia has resorted to requesting for its debt to either be

cut or for repayment to be delayed. This unpopular move has sent its bonds sinking further

this week.


How the Zambian default has played out

In early April, the government called in restructurers and banks to advise on some $11.2bn of

debt after the coronavirus started causing tremors in the economy. Around a month later,

Lazard, whom last year advised neighbouring Mozambique and this year Lebanon and

Argentina was picked by the Zambian government to restructure its debt. Zambia did obtain

relief from some of its bilateral creditors under the G20 Debt Service Suspension Initiative

(DSSI), which allows up to four years to repay and the deferral of arrears. However, an IMF

loan remained elusive due to the dangerous nature of Zambia's debt – at an IMF press

briefing on the 21 st May, it was made clear that ‘any IMF financial support, including

emergency financing, is contingent on steps to restore debt sustainability’; however,

‘Zambia’s public debt is on an unsustainable path’. Furthermore, with elections imminent, it

is suspected that Lungu is seeking to avoid IMF-mandated policy tightening that would come

with assistance.


In September, Edgar Lungu’s government requested ‘the suspension of debt service

payments for a period of six months’, beginning in October, to holders of $3bn in

international bonds. For this request to be approved, two-thirds of bondholders would have to

consent. Bondholders were immediately sceptical given the doubt over whether all creditors

would be equally treated and the murky nature of China’s debt. A group of around 40% of

the creditors, including hedge funds Pharo and Amia Capital, hence sought to block the

deferral of payments and published a statement calling for greater transparency. The Chinese

government has engaged in some debt relief – however, other official Chinese lenders

demanded their share of around $200m in arrears before they succumbed to a deferral. The

crux of the impasse throughout has therefore been whether creditors would be treated the

same – hedge funds did not want their suspensions to facilitate payments to Beijing and vice

versa.


In late October, Zambia missed a $42.5m interest payment on $3bn worth of bonds. When

Zambia failed to pay the coupon by evening last Friday (13 th November), the end of the grace

period, it had officially defaulted on its debt. This was Africa's first default during the

pandemic and its first-ever default on multiple dollar bonds at the same time. In the eyes of

the Zambian government, a default was seemingly the only option – in the days following,

finance minister Bwalya Ng’andu said on state TV ‘If I pay [bonds], the moment I pay, the

other creditors are going to put dynamite under my legs and blow off my legs. I’m gone. I

can’t walk any more. If I don’t pay the bondholders, my legs will remain intact.’


The Future of Zambia (and Debt Restructuring)

The Zambian debt crisis serves as both, a template, and a cautionary tale for investors.

Ecuador, Lebanon, Belize, and Argentina have already defaulted, or are in the process of

restructuring their debts. Zambia was not the only casualty this year, but it was certainly the

most prominent due to its $12 billion debt. Given the controversy surrounding Chinese debt, and the growing restlessness of European bondholders, the IMF has agreed to step in and try

to rectify the situation but has been unable to agree to an economic rescue program without

being comfortable that its debts are sustainable.


The IMF had proposed some ideas last month in their policy paper. Many of the ideas

outlined seem tailor-made to counter Zambia like situations while avoiding the mistakes

made by their last big policy paper in 2014 (pertaining to the Greek debt crisis). One of the

big changes proposed is the shift toward greater use of state-contingent instruments in order

to incentivise creditor participation and to protect the sovereign from future downside risks.

The IMF also wants to introduce clauses that automatically trigger payment standstills when

natural catastrophes bludgeon potential economic growth. Most importantly, the IMF aims to

follow a more 'unified approach when dealing with state lenders' and ensure a more equal treatment with commercial lenders.


The IMF has outlined some pretty ‘bold’ measures when it comes to debt restructuring and

hopes to avoid such tense standoffs between the debtor and creditors in the future. However,

it remains to be seen how well investors can ‘take a hit’ in instances of current/future

defaults, given the high probability of sovereign bankruptcies in the coming years (see graph

below).

What do you think? Let us know in the comment section below!

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