Zambia Bonds Fall to Record as S&P Downgrade Threatens Debt Plan

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Zambian dollar bonds fell, driving yields to an all-time high, after a credit-rating downgrade by Standard & Poor’s cast doubt over the government’s plans to sell its third Eurobond.

Yields on the southern African country’s $1 billion of debt due April 2024 climbed for a fifth day after S&P cut its assessment one step to B, five levels below investment grade and the lowest since S&P coverage started in March 2011. The slide in prices deepened losses for Zambian dollar notes, the worst performers last month among 58 emerging markets monitored by Bloomberg.

The administration of President Edgar Lungu is struggling to cope with declines in copper prices since taking office in January and a currency that has depreciated 15 percent this year. The government has signaled it may sell as much as $2 billion of Eurobonds to plug a budget deficit S&P estimates will swell to 10 percent of gross domestic product in 2015, higher than the state’s projection of at least 6 percent and the 7.7 percent shortfall forecast by the International Monetary Fund.

“They’re probably rethinking it, but at the end of the day they have no other funding whatsoever,” Celeste Fauconnier, an Africa analyst at Johannesburg-based Rand Merchant Bank, the investment banking unit of Africa’s largest lender by market value, said by phone. “Investors will be a bit more wary of going into these issues, and if they do go into them, they’re obviously going to ask a premium.”

Election Spending

Yields on the 2024 notes increased seven basis points to 8.49 percent as of 3:36 p.m. in London, after earlier rising as high as 8.52 percent. An index of Zambian dollar bonds lost 5.5 percent in June, compared with an average decline of 1.7 percent in the Bloomberg USD Emerging Market Sovereign Bond Index. Zambia’s kwacha weakened as much as 0.5 percent before trimming losses to trade 0.2 percent down at 7.5227 per dollar.

The government may struggle to keep spending under control before elections in 2016, S&P said in a statement on Wednesday. Including debt payments, the budget gap is forecast by S&P to reach 14 percent of GDP.

Zambia will stick to its plan of cutting 5 billion kwacha ($665 million) of non-essential spending from its budget to keep debt under control, Finance Minister Alexander Chikwanda told reporters in Lusaka on Thursday.

“When you have scarce resources versus your vast needs, you have to learn fiscal prudence,” he said. “We’ll make sure we have fiscal prudence. We will cut our suit to the available cloth.”

Under Strain

The budget is coming under strain after Lungu, who took office after the death of his predecessor Michael Sata, agreed to scale back plans to increase taxes on mining companies. State revenue from mining may be as much as 50 percent lower than budgeted because of sliding output and uncertainty about the tariffs, S&P said.

A weakening currency may also add to the nation’s debt burden. Fitch Ratings warned on June 29 that interest payments on debt may surge to 17 percent of government revenue this year, up from 8 percent in 2012. Fitch rates Zambian debt at B, the same as S&P. Moody’s Investors Service has an assessment one level higher at B1. If authorities go ahead with the Eurobond plans, Zambia’s debt burden will increase to about 50 percent of GDP, S&P said.

“The vulnerability of the kwacha is a major issue on this front as a greater external debt load will mean currency risks become much more acute,” Gareth Brickman, an analyst at ETM Analytics in Johannesburg, said in a note to clients.

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