Africa’s second largest copper hot spot Zambia, made headlines on 22 June when an announcement was made at the Finance Summit about a breakthrough in debt restructure proposal. This deal was brokered by French President Emmanuel Macron who served as co – chair of the official creditors committee with China after months of deliberations. The restructure assurances come 22 months after Hakainde Hichilema’s ascension to power and exactly 10 months after the International Monetary Fund (IMF) board approved a $1.3 billion extended credit facility to help with efforts to restore fiscal fitness in the Zambian economy. A relief of $6.3 billion in bilateral debt with lengthened repayments of 20 years, at lower interests rates does allow for an effective reorganization of economic production possibilities earlier constrained by fiscal bottlenecks.
For a number of years, debt service for Zambia was the biggest impediment for robust growth and has been a major contributor to soaring poverty levels. The Southern African nation accumulated debt through issuances of dollar bonds totaling $3 billion for purported infrastructure projects that arguably did not generate sufficient cash flow for serviceability and project finance with the Chinese in a manner where the flows did not circulate through the veins of the economy. Other debts contracted were commercial in nature that burdened the fiscus. Debt service in foreign currency has persistently added demand for dollars thereby accelerating the rate of depreciation of the Kwacha in the absence of a robust manufacturing and production capacity generally to cushion supply bottlenecks.
The economic reforms undertaken by Hichilema’s regime have seen reorganization of the red metal producers fiscal purse sending a signal of hope to the Zambian economy hamstrung by debt. On arrival from France, Hichilema acknowledged the efforts by his French counterpart Emmanuel Macron, co – chair of the official creditors committee with China, in brokering the landmark deal for Zambia and that work for the Southern African nation had just began. Hichilema also urged Zambians to maximize agriculture production given the countries arable land and water bodies to help spur gross domestic product. Reflecting on his Ukraine – Russia visit as part of African heads of state initiative to foster peace, Hichilema urged Zambia to continue embracing peace a key component in the ease of doing business.
Zambia’s debt treatment provides a 3 – year moratorium with interest only, serviced in the period with a two decade repayment tenor. Zambian authorities will now seek to finalise restructure of the private creditor portion, of the external debt stock with eurobonds being the most complex. Dollar bond obligations, total $3 billion and are credit rated whose succesfull restructure will improve the copper producers long term issuer rating on foreign currency from the current default status. Being the first defaulter on dollar debt in pandemic times, external credit lines for Zambia had narrowed and this overcrowded the local domestic money markets as an option but kept yields on government securities elevated.
“We bemoan the high interest rates and would like to see rates as low as those in Europe evetually,” Hichilema said in his first national address on his return from France. This, he made reference to the efforts by the Emmanuel Macron Paris finance summit that seeks to improve financing options for emerging and frontier markets especially at a time as this when the world is in economic distress.
Sovereign risk was the biggest inhibitor of growth in the Southern African nation with commercial banks bearing the brunt of constrained risk appetite tied to the nations credit rating. This had implications on sector financing generally as credit line access was contrained too. The $6.3 billion debt treatment does unlock possibilities for the the private sector and a complete resturcture of the entire debt stock will give the banking industry a positive cue.
Foreign exchange and interest rate markets will continue to seek clues and clarity around next steps in the coming weeks.
The Kwacha Arbitrageur