LUSAKA (The Business Telegraph):- It is a Russian roulette moment for Zambia as the 29 September draws nigh. At 12.30pm – London Time Finance Minister Dr. Bwalya Ng’andu will be addressing investors about the copper producers debt situation. This follows an application by the MinFin to freeze coupon payments between 14 October 2020 to 14 April 2021. Eagerness continues to grip Africa’s second largest copper hotspot as to whether its dollar bond holders will nod or reject its request to defer coupon payment in question.
The Southern African nation, on 22 September, reached out to its eurobond holders requesting a defferment of interest payment freeze for 182 days as part of a debt restructure process commenced by advisors Lazard at a time when disease pandemic has weighed acutely. The copper producer was earlier grated an interest freeze on its Paris Club debt nodded by the G20 running 01 May to 31 December 2020 after it had requested for a 2 year moratorium nonetheless. Zambia has reached out to all its key creditors for reprieve in debt service with responses awaited.
RUSSIAN ROULETTE – YES OR NO
Will Zambia succeed in pulling this one off? The answer lies in the authorities tact in quickly engaging the Washington based lender International Monetary Fund – IMF for a statement to calm investors nervousness. The MinFin will nonetheless have a shot at convincing the dollar bond holders in a presentation in which investors will search for clues as to the IMFs mood about the steps Zambia has taken to restore fiscal fitness and demonstrate consolidation of its fiscus. It is clear that bondholders are more inclined to agreeing if IMF talks are progressing satisfactorily in the absence of which two thirds majority may be a fallacy. The reason for this tact would be for the IMF to endorse or support restructure actions which are a necessary step towards an economic bailout package which has for a long time been a mirage on account debt sustainability concerns. We remain cautiously optimistic that bondholders will accept the request evetually.
A ‘YES’ TRIGGERS A CREDIT EVENT
Dollar bondholders acceptance of Zambia’s $160million coupon request will trigger a credit event that will further result in increased appetite for protection using Credit Default Swaps – CDS’s for periods in excess of 6 months. (>6months reflects the uncertainty given the country’s sovereign risk profile). Last week, rating agencies further lowered the copper producers credit assessment to “C” from “CC” for Fitch and “CCC-“ from “CCC (-ve)” for S&P while it remains “Ca” for Moody’s.
2021 BUDGET WAS NEUTRAL – NO FIREWORKS
Bondholders sought clues for economic turnaround in the budget presented on the 25 September however the widened fiscal deficit of 9.3%projected for next year while vague strategy around fiscal consolidation remains a source of concern. Zambia has provided for $1.3billion (Kwacha equivalent) for external debt service but given the currency rout, this provision could be eroded by depreciation of the local currency. The $6.6billion (K119billion) estimates or revenues and expeditures is expected to “V-shape” recover growth to 1.8% next year from a 4.2% recession this year.
The budget dubbed Stimulating Economic Recovery and Building Resilience is expected to steer Zambia through 2021 as the authorities target to claw back eroded growth.
The Kwacha Arbitrageur