Zambia Default Risk Highlights Africa’s Debt Crisis Bond Investors Payments in South Africa Zambia

Faced with financial difficulties made worse by the coronavirus pandemic, southern African nation Zambia appears to be heading towards defaulting on its debt to private investors

One of the world’s largest copper producers, Zambia has been heavily in debt for years, but could now have an undesirable reputation for financial unreliability if a group of investors hold the country’s $ 3 billion Eurobonds insists on overdue payments. Zambia is asking for a six-month leave, but the bondholders’ final decision is pending.

The cash-strapped country is a stark example of other African governments’ over-indebtedness even as they try to focus limited resources on pressing issues such as health care and education. Zambia’s tariffs will be watched by other countries that owe large sums not only to private bondholders, but also to commercial banks and public lenders such as China.

A debt moratorium granted by G20 countries in response to the pandemic that has freed up to $ 20 billion for low-income countries ends at the end of December, and African governments are asking for an extension to free up additional resources for fight the COVID-19 pandemic and help struggling economies.

A default on private debt is damaging in the eyes of investors, and the rating agency Fitch downgraded Zambia to near-trash status after the government sought to delay payment of interest to bondholders in September.

Zambia’s impending default “definitely sends the wrong signal to investors,” said Stephen Kaboyo, a Ugandan analyst who heads asset management firm Alpha Capital Partners. “There is always a comparison with the peers,” he said. “They ask themselves, ‘Who’s next? “”

Abebe Selassie, director in charge of Africa at the International Monetary Fund, sought to allay concerns at a press conference on October 22, saying he hoped the market would differentiate Zambian assets from others in Africa.

“This is what we are seeing so far, and I hope it will continue to be the case, as it is elsewhere,” he said.

South Africa-based research firm NKC African Economics in an assessment linked to Zambia’s problems said it saw a “moderate” risk of contagion across the region and warned that global trade pandemic could increase default risk across sub-Saharan Africa. Region.

A “prolonged external shock could disrupt refinancing efforts” in Kenya, Ghana and Senegal in the debt cycle that begins in 2021, he said.

Many countries in sub-Saharan Africa, from Cameroon to Kenya, have issued Eurobonds over the years, racking up debts that fall due at a time of increasing financial burden amid the pandemic.

The World Bank and the IMF have announced relief measures, including the release of billions in debt payments, and some African countries have obtained more loans from these institutions. But debt anxiety will intensify at the end of the year.

Nathan Hayes, an analyst with the Economist Intelligence Unit, told The Associated Press that for Africa, “the situation in 2021 is different” as $ 20 billion in private bonds mature in addition to $ 14 billion. bilateral debt dollars.

“These debts are highly unlikely to be part of a renewed suspension initiative, as this would reflect negatively on sovereign credit ratings and potentially restrict market access at a crucial time,” he said. . The burden of services will increase again in 2021, putting pressure on governments.

The appetite for debt has increased dramatically in Africa as governments launch ambitious public works which they believe will support growth for years to come. Projects are often financed with Chinese capital and built with Chinese expertise. In turn, China has been keen to exploit Africa’s vast natural resources in countries like Zambia, which is also a major producer of cobalt.

Backed by credit from China and other outside sources, the Zambian authorities have spent everything from highways to airports, on projects sometimes marred by official corruption. This spending is likely to slow due to pressure to reduce backlogs, and there are many reports of projects stalled, including a $ 450 million dam.

China holds about a third of Africa’s sovereign debt, and some fear heavily indebted countries will fall into a trap and even lose their sovereignty. While largely silent on global calls for debt relief to Africa, China has indicated its willingness to renegotiate and restructure debts to African countries, especially those that export important commodities like China. petroleum, according to Hayes.

It remains unclear whether the international community will do more to help seriously over-indebted African governments.

African finance ministers have asked the international community for a $ 100 billion stimulus package, of which $ 44 billion would come from a debt service freeze. They also said an additional $ 50 billion may be needed in 2021.

But while African governments can negotiate bilateral debt and even get cancellations, sovereign bonds are another matter.

A government is ‘finished’ if it cannot be counted on to make payments on sovereign bonds, said analyst Julius Mukunda, who heads a budget advocacy group that has sounded the alarm bells about the surge. Uganda’s debt levels soar.

Although Uganda has never issued Eurobonds, he said, “we have a problem” as the East African country spends a lot more of its budget on interest payments. foreigners than in the agricultural sector, the backbone of the economy.

As for Zambia, “they have to borrow to pay off the debt,” he said. “You need an IMF package to save you.”

Carol M. Barragan

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