Zambia became the first African country to ask bondholders for relief since the onset of the coronavirus, raising fears of a wave of defaults rippling through the continent as a decade-long debt binge unravels.
The southern African country said Tuesday it’s running out of cash to service its debts and needed “breathing space” to plan a restructuring announced earlier. It asked holders of its three Eurobonds totaling $3 billion to defer interest payments of almost $120 million until April, sending the securities plunging to barely half their face value.
Other countries have rung alarm bells already. Angola, which has negotiated $6 billion in debt relief with some of its lenders, told the International Monetary Fund 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, and Kenya said it’s at risk of debt distress as borrowing costs rise faster than revenue.
Falling commodity prices and an exodus of capital triggered by the pandemic has crippled economies across the continent that now have to repay billions of dollars in debt raised from bondholders and Chinese banks. More than a third of African countries are approaching or already experiencing “debt distress,” according to the International Monetary Fund.
“Zambia may open the door for other distressed sovereigns” even though its fiscal problems predated the pandemic, said Stuart Culverhouse, head of fixed-income research at Tellimer Ltd. in London. “The longer the pandemic persists, and the longer it takes for countries to recover, the higher the likelihood that countries that already had weaknesses coming into the crisis will have to restructure.”
Zambia, whose external government debt jumped sevenfold in a decade, said the pandemic triggered an unprecedented liquidity crunch that complicates its capacity to repay debt on time. Its $1 billion of Eurobonds due 2024 were steady on Wednesday after plunging 4.5% on Tuesday to 52.46 cents in the dollar.
The currency of Africa’s second-biggest copper producer is the world’s worst performer this year, making payments on its $11.7 billion in external debt even more costly after foreign reserves slid to record lows. The government said it hopes its restructuring plans will win support from the IMF.
Zambia last month secured an eight-month debt freeze from some official lenders under the Group of 20 debt-suspension initiative launched in April. As part of this accord, Zambia was also obliged to seek comparable terms with commercial lenders, according to Mukuli Chikuba, permanent secretary at the finance ministry.
“What we are getting into is not a default per se, but consensus-building,” Chikuba said by phone. The government, which hired Lazard Freres earlier this year for advice on its debt strategy, will outline a set of proposals to bondholders on Sept. 29, he said.
The G-20, whose finance ministers are due to meet in October, is struggling to agree on the length of the extension of the moratorium and how to convince private creditors to join in. Any coercion to get private creditors involved would tip borrowers into default and hurt financial markets, the Institute of International Finance, a trade group that represents banks and financial institutions, wrote in a letter to the G-20 on Tuesday.
However, some see private relief as crucial to avoid a slew of non-payments in the continent. The maturity profile of African Eurobond debt is relatively benign, with no large principal payments due before 2022. But countries may find it difficult to meet interest payments on the securities while also servicing large debts with bilateral lenders.
Eurobond Profile May Help Africa Avoid Mass Default: Chart
“We are seeing the fall of the most vulnerable now, which is a prelude of the avalanche of defaults to come if no urgent action is taken now on private debts,” said Jaime Atienza, who leads Oxfam’s international debt policy.
For now, Zambia is an outlier, said Anne Fruhauf, managing director at advisory company Teneo in Mexico City. But other countries will watch how the market reacts to Zambia’s approach, with the region’s borrowing costs already perceived to be unfairly high. Negotiations with Chinese lenders to reprofile loans will also be a key part of a comprehensive solution to Africa’s debt problems, she said.
African Nations Say They’re Getting a Raw Deal From Wall Street
“If they can help it, no other country will want to stick its neck out,” Fruhauf said. “Still, Zambia’s move may fuel bondholder alarm over similar credit events across the region. Although the G-20 call for private creditor participation on ‘comparable terms’ has fallen on deaf ears for now, this debate is far from over.”
Under Zambia’s interest-holiday request, it will pay bondholders $0.50 per $1,000 in bond principal they hold if the coupon-payment suspensions are approved.
Bondholders accepted a similar holiday request from Ecuador in May, paving the way for a successful restructuring of $17.4 billion in bonds. To convince creditors, the South American country promised economic reform and secured a new IMF loan. Zambia has so far failed to agree on an IMF bailout and has had tense relations with investors.
What’s more, it could prove challenging for Zambia to curb spending with elections due next year, said Neville Mandimika and Daniel Kavishe, analysts at Rand Merchant Bank in Johannesburg. Should bondholders agree to a suspension of interest payments, that would still constitute a default in terms of ratings company methodology, they said in a clinet note.
Zambian Finance Minister Bwalya Ng’andu is due to present the 2021 budget on Friday, which could offer insights into the government’s restructuring strategy and chances of winning an IMF bailout.
(Updates with analyst comment in second paragraph after second chart)
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