Hamstrung by debt, the world has relentlessly sought ways of solutioning for this burden, a path that has not been as seamless. It is vivid that the once lucrative Eurobond market that channeled capital to frontier markets while the Chinese also funded infrastructure projects as part of their belt and road agenda globally, was the major conduit for debt build up. Exacerbating this burden was a pandemic that shifted focus to health care for the sake of humanity at a very difficult time. Labor as a factor of production was at risk of extinction a problem that needed excessive funding not only for innovation of a medicinal vaccine but to save lives through supply of oxygen and other facilities in the pharmaceutical and medical faculty.
The aftermath of this was a series of actual to near sovereign defaults on running debt because obligations became too enormous to service. Supply chain disruptions were the order of the day, currencies volatile, uncertainty steeply widened and business collapsed from exterminated demand. Coupled with the state of the global economy, marred by a strong dollar environment, post pandemic and geopolitics induced uncertainty, asset sell-off pressure continues to trigger currency depreciation pressures and bearish trending yields on government securities fueling higher term funding costs. Multilateral institutions such as the World Bank and the IMF alongside central banks have continued to support the global environment through interventions whose postmortem effects arguably have led to excessive inflation which is currently being curbed by rate hikes yet to tame the worlds price pressure disease. One notable intervention was the record special drawing rights (SDR) that saw many countries get reprieve aimed at easing balance of payment pressures. Debt restructure was still the biggest elephant in the room that needed addressing. The 2022 SDR allocation headlined $650 billion of which about $275 billion went to emerging markets and developing economies.
One frontier market that has been used as a barometer for economic direction is Africa’s second largest copper hotspot Zambia. The first dollar bond defaulter in COVID era, in the labyrinth of a debt restructure that has shriveled its growth, widened fiscal deficit and strained its currency. The International Monetary Fund approved Zambia’s request for financial assistance in a $1.3 million extended credit facility, a precursor for debt restructure on 30 August 2022. Politically, the red metal hotspot had a change of government in August 2021 that saw the ascension to power of Hakainde Hichilema for which the currency market reacted with a strong rally taking a cue from a confidence boost the market lacked in a long time. Despite an IMF deal, markets remain fatigued by delayed restructure that continues to breed uncertainty. It has been reported that the debt reorganization process has been protracted by demands by China one of the largest creditor in the ongoing discussions.
READ ALSO: As Georgieva and Yellen court Zambia, Markets seek clues around Debt Restructure
The greatest hurdle has been the share of haircuts on outstanding debt in the 50’s which the second largest economy requested should extend to multilateral development banks. The complexity is also housed in the granularity of dollar debt, the most toxic of all by virtue of being the only portion that until dealt will keep Zambia’s default rating on foreign currency rating unchanged. For a long time frontier nations have shied away from dollar bond markets due to high credit spreads reflecting elevated sovereign risk.
In a meeting of finance ministers in Washington on the sidelines of the IMF and World Bank Spring meetings, People’s Bank of China (PBoC) Governor Yi Gang said the country was willing to work through the so called G20 common framework for sovereign restructurings. The common framework seeks to bring together bilateral creditors of countries weighed by debt distress for which Zambia, Chad and Ethiopia have signed up.
China is willing to work with all parties to implement the Common Framework for debt resolution,” Yi said in a statement released by the People’s Bank of China. The G20’s Common Framework seeks to bring the main bilateral creditors of countries with distressed debt together for negotiations. So far, Chad, Ethiopia and Zambia have signed up to take part.
The IMF and World Bank Spring meetings could not have come at a better time when frontier markets are deeply entangled in debt and economic woes. China’s second biggest stance on easing some of its demands will likely be what will make emerging markets a capital darling for global liquidity. The biggest gesture was at the last spring sessions when China agreed to join the party in restructuring debt under the G20 common framework. The biggest deal breaker has been China who has been accused by the US, World Bank and IMF in the reorganization efforts by frontier markets which the world were skewed to interpret as a geopolitics theme.
Zambia is on the cusp of the second tranche of its ECF payment of $188 million, but on condition that creditor assurances are obtained. The odds of assurances are likely to widen with the recent developments surrounding China’s stance on easing demands in the debt reorganization process. China’s posture has been very cautious as it also deals with a plethora of economic hurdles ranging from a frail property market to financial regulatory concerns domestically as such its position on debt has been very calculated. Many market players have questioned why frontiers have not negotiated individually with China however the reality is that Chinese solution is a one size fits all as it looks at the $275 billion EM and Africa owes. The sensitivity and frailness of outstanding debt has ramifications on its indigenous economy for which it has set out a 12 point peace plan.
READ ASLO: Hichilema Dispels Assertions Around Zambia being a ‘Geopolitical Turf’ for US and China
Zambia has been the centre of gravity in the debt discussion but with immense support from the World Bank President David Malpass dubbed the ‘heroic warrior’ fighting for emerging markets in this difficult period while the U.S. Secretary of State Janet Yellen visited African nations a trip that touched Africa’s copper producer Zambia in the year. The IMF Chief Kristalina Georgeiva was in Lusaka, Zambias capital on a special visit which barely a few weeks later US Vice President Kamala Harris ended her Africa tour with a trip to once homeland Zambia. Each of these trips had these leaders echo support for the efforts frontier markets put in to improve their fiscal postures but for debt restructure which had delayed and was making markets nervous.
It is still in the best interests of the three classes namely frontier markets, the west and the east to resolve the debt impasse as each symbiotically needs the other especially in the era of the green economy. Emerging markets house green resources that the west and east need for their technology to make the world a better place to live in. With the recent stance by China, EM nations are seeing currency rallies posing great opportunity for short positions while the positive outlook will trigger strong capital flows making these jurisdictions next safe haven assets after gold and dollar denominated assets.
The Kwacha Arbitrageur
