Zambia careening towards debt debacle

Zambia has been careening towards a debt debacle for months, even years. Now it has become the first African nation to default on sovereign payments since the pandemic began. That’s bad news for everyone involved, from the bondholders who refused to agree to a standstill, to Chinese lenders, multilateral institutions and the government. A protracted restructuring lies ahead. More transparency might have helped all parties, including Beijing.
Emerging markets have been battered this year, as the price of oil and other commodities came crashing down once coronavirus took hold. Tourism revenue dried up, while lockdowns and other costly restrictions were imposed. Sub-Saharan Africa will see its economy shrink 3.3% in 2020, according to the World Bank, the region’s first recession in 25 years. Enthusiastic borrowers like Zambia have come under severe pressure. In October, Lusaka missed a $42.5 million interest payment on a dollar-denominated bond, prompting a grace period to kick in. That expired, giving bondholders the right to demand immediate repayment.
Africa’s second-largest copper producer has been closely watched as a test case in the global post-coronavirus debt mess. With $3 billion of outstanding eurobonds, it had sought shelter as part of the Group of 20’s debt service suspension initiative (DSSI) for low-income countries. Bondholders dug in their heels. Finance Minister Bwalya Ng’andu said the country had no alternative but to “accumulate arrears.”
Much of the problem, apart from the absence of a convincing government plan to turn the country’s fortunes around, is that the debate has been held in the dark. Private bondholders are jostling with China and other creditors, but there is little light shed on the specifics of loans and negotiations, on either side. It has left all involved with few facts and plenty of suspicion. China Development Bank agreed to a repayment deferral with Zambia in October — but no details were provided.
Not all African countries are in such an acute predicament. Zambia’s leaders bear responsibility: The debt burden has increased steadily since 2012, thanks to expansionary fiscal policy and often profligate infrastructure spending, at a time when growth was unimpressive and the currency weakening. The IMF warned about the risk of debt distress well before Covid-19. The ratio of debt to gross domestic product could exceed 110% this year, according to forecasts from rating agency Moody’s Investors Service.
But while the protagonists of this crunch have been bondholders, who account for a much larger chunk of African debt than even a decade ago, it is China that has loomed over their discussions. Chinese credit accounts for more than a quarter of Zambia’s external public debt, and private bond investors, themselves hardly paragons of transparency, want more information on Lusaka’s dealings.

—Bloomberg