Economic fortunes for Africas red metal hotspot are at brink of a positive turnaround following strides attained in the fiscal space. Having made headlines for being the first to default on its dollar debt in the pandemic period, Zambia’s credit profile sees reprieve in sight following strides the creditor engagement process has made over the last few weeks. The copper producer continue to be on the receiving end of light at the end of a debt tunnel hinted by World Bank and International Monetary Fund leaders in the last one week.
Expected value of perfect information
Markets on the other hand remain eager on clues as to wether the red metal producers case will make it to the September 2022 IMF board session. It’s exactly 20 months since Zambia officially applied for financial assistance with the Washington based lender in December 2020. Markets have gyrated and dithered over progress on bailout possibilities precipitating a weariness manifesting in outcomes such as currency volatility to asset sell off pressure as investors showed elasticity to news in the fiscal space. The period August to date has seen accelerated efforts through unique engagements such as head on meetings with private creditors in London by head of state Hakainde Hichilema while historic meetings such as courting IMF and World Bank chiefs was landmark in Zambias history. Political will in the Southern African nation has ignited confidence that has spurred risk appetite to claw back into an ailing economy. Supporting the surge of appetite has been rising copper prices supported by strong global decarbonization drive to support climate change mitigation initiatives such as the electric car battery. The mining outlook takes a cue off the changes in mining tax announced by Dr. Situmbeko Musokotwane concerning the now tax deductibility of mineral royalty taxes a hurdle that cost Zambias industry exploration investment propensity for years. And linked to the mining faculty has been the salvaging of the 2 year divorce between Copperbelt Energy Corporation and ZESCO Ltd over the bulk supply agreement (BSA). Energy supply to the mines is now guaranteed and will be key in supporting the 3 million metric tons 10 year target.
The very stone that the world rejected is now the cornerstone
Default rated on its foreign currency debt by S&P, Fitch and Moodys after the red metal producer skipped coupon payments on its Eurobonds for which it has a stock of $3billion outstanding, the earliest maturity being $750million in September, Zambia is making headways its fiscal fitness journey. Creditor talks have advanced with the most resent position being creditors committing to providing assurances whose condition paves way for the IMF to disburse the $1.4billion requested by Zambia.
Zambia grapples with $30billion in debt whose burden has crippled growth over the years robbing it of rates of 6-7%. The pandemic worsened fiscal posture by causing a reallocation of resources to the health sectors at the expense of productive sectors of the economy.
The Banking sectors have borne part of the brunt
Banks models have born the brunt of sovereign posture
Commercial banks have taken dents on provision stock from both financial reporting standards that prices sovereign posture, deteriorated cash flow position of counter parties some of whom were owed by the state in domestic arrears. Upgrades in the local currency debt profile have been reported by S&P and Fitch to ‘CCC’ with some reprieve to some extent yet the critical that reflects transfer and convertibility risk remains in default. A deteriorating debt profile scaled the Kwacha demand curve to records in the 30’s counterintuitive to decongesting domestic markets for private sector credit growth.
Sources of risk appetite pre IMF deal closure
The autopsy of the Russo Ukrainian war dislocated grain markets spiraling soft commodity prices which Zambian agribusiness leverage off to improve export outlooks to supply deficits in wheat, sugar, soya and corn. Zambian agribusinesses are liking to double assets to widen their production to feed the region. On the downside petroleum price pressures continue to weigh manufacturing pulse as global crude remains pricey on account of supply constraints and rising demand fundamentals. But with recessionary fears demand could be fading and that could entail long term softer prices supportive of emerging market growth. It remains a dry point of construction that the exogenous factors in the global environment remain the biggest threat to the world. Supply chains are recovering but a bigger problem – softer demand is has emerged and will manifest in a downward push in commodity prices the same way the bellwether for global pulse copper shaved 26% of its gains to trade between $6,500 – $7,000 a metric ton on the London Metal Exchange.
How dollar bond holders hold the keys to any upgrade discussions despite being a minority in the debt stock
Dollar bond holders are the credit rating determinants
Zambia’s strides with the creditor engagement is commendable as the assurance provided by the creditors spell hope towards the restructure process but a bigger hurdle lies in the small creditor group dubbed the privates, typical your Eurobond holders that are more capitalistic in nature and are the most notorious to earning Zambia a positive credit rating from the currency default status. Private creditors are less like to accept to a haircut seeing that they represent investors whose funds are managed by hedge funds and other money managers. The fast evolving threat landscape that has seen a rising rate cycle is the reason any haircut discussion is likely to delay let alone they may outrightly refute any haircuts but prefer meeting part of the obligation and deferring the other for it to make economic sense on their investment. While the world is in chaos and yields in the west underwater an option would be to offer them Kwacha bonds that are the more lucrative globally on the premise that with an IMF deal a stronger currency will hedge them grown from any fears of exchange rate loss. Private creditors may be the smaller chunk of the creditor stock but have the strongest say in restructure that will lead to a rating upgrade because their debt is rated. Suffice to say in the absence of consensus with dollar bond holder default rating will not change at all. Zambia has an outstanding dollar bonds of $3billion maturing 2022, 2024 and 2027.
The Kwacha Arbitrageur
