Africa’s second largest copper producer has made strides in its debt restructure deliberations with the most recent announcement by the International Monetary Fund Managing Director Kritalina Georgeiva on the lenders website. Its over 20 months since the red metal producer officially requested for a package amidst frail fundamentals and widening debt woes. In the period Zambia has seen drastic shifts in political posture following change in governance regime fueling a stronger will to restore fiscal fitness. In the period August 2021 to date the Zambian head of state has courted the IMF and World Bank Chiefs key of which was in Washington while other informal engagements include on the side lines of EU meetings etc. Creditors have been able to have sessions with the head of state to provide assurances that most had expressed concerns about previously.
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Zambia has seen a plethora of positive news and developments key of which was the MinFin attaining consensus with the IMF Mission team for $1.4 billion extended credit facility. At this stage a road map was shared with bilateral creditors with the expectation that a deal with the Washington based would be sealed by 1Q22 but this was moved to 1H22 whose target was again shifted to hopefully 3H22 with markets eager about September 2022 when the IMF board convenes.
Zambias head of state Hakainde Hichilema courts dollar bond holders in London in 2021.
Restructuring news bullish but Eurobond holders also need to nod
Attaining assurances from the bigger creditor classes comprising china and the west is a positive stride but one class of creditors that need to be won over remains the private creditors and Eurobond holders who may potentially oppose debt restructuring terms. Despite the smaller portion of the overall debt, they hold the keys to credit rating as the debt portion they represent is graded. International rating agencies – Standards and Poor’s, Fitch and Moody’s downgraded Zambia’s foreign currency rating after the copper producer skipped coupon payments in pandemic period. It is a dry point of construction that this position will only improve when graded debt is fully restructured. The current state of the global environment does not make it any easier for hair cut and general restructure conditions of this commercial portion of debt. A window of opportunity that exists is one where western treasuries are inflation under water making Zambia treasuries one of the best yielding in the world given stability in currency. The restructure discussion could leverage off providing assurance of exchange rate stability post and IMF deal and swapping the due debt with government securities, before the window closes when the west successfully tames spiraling inflation.
Complexity of dollar debt restructure in chaotic world
Fundamentals have evolved and deteriorated from the 2020 period when Zambia formally applied for bailout support as inflation was fairly low and the US Fed was dovish in the quest to support a rallying bond and stock market. The current global threat landscape is characterized by the worst global bond meltdown, 40 year highs of inflation and above all an aggressive rate hiking cycle. Global bonds and EMs have shaved 22% while equities plummeted 16% to date. The quagmire lies in getting private creditors that are facing losses on their EM and developing market bond portfolios, to agree to further losses in haircuts. This can be inferred from the world Fund managers like Blackrock have shown that they are reluctant to having restructure talks under such global fixed income market conditions even under social pressure from governments and social activists that have activated for haircuts of up to 60%.
Analysts arguably deem Zambia as a test case for IMF and the World Bank to get China into a new global lending agreement on the back of the G20 common framework. China is in the labyrinth of a $171 billion Africa credit portfolio while simultaneously navigating a domestic banking and local government bond quagmire in 2022.
Other schools of thought propose renegotiating the conversion of outstanding dollar bonds to local currency bonds on condition that there’s assurance of foreign exchange stability for the period of IMF and World Bank support. If managed effectively, this will hedge Zambia against forex USD flight in September 2022. However on the downside this will increase the stock of government debt stock by 8% potentially to K12 billion.
The Kwacha Arbitrageur
