Zambia's Bonds Plummet on Concern It's Pulling a MozambiqueBy and
Investors question government’s official external debt figure
Zambian bonds are worst-performers in emerging markets in 2018
Investors fretting that Zambia may have more debt than it’s let on have sent the nation’s Eurobonds tumbling.
Yields on the copper-producing country’s $1.25 billion amortizing bonds due in 2027 rose as much as 54 basis points on Monday to 8.45 percent, the highest in more than a year. The debt pared losses on Tuesday, with yields falling 9 basis points to 8.33 percent by 12:39 p.m. in London.
Banks including Nomura Holdings Inc. say the government may have greater external liabilities than the official figure of $8.7 billion. That’s bad news for holders of Zambia’s dollar securities, which have already lost 4.7 percent this year, the worst performance in the Bloomberg Barclays Emerging Markets USD Sovereign Bond Index, which includes more than 70 countries.
The risk is that investors could find themselves in a similar situation as those in Mozambique, where hidden debts led to a default and the government is seeking to restructure.
Zambia has been in talks for several months with the International Monetary Fund about a $1.3 billion bailout, but the two sides have failed to strike a deal, partly because of the Washington-based lender’s concerns about foreign borrowings.
“The risk of debt defaults, especially on short-term high-interest loans, is rising fast,” Robert Besseling, director at political advisory firm EXX Africa Ltd., who also believes Zambia’s debt could be much higher than the official number, said in a note Monday. “In the absence of an IMF aid program to boost foreign currency reserves and improve balance of payments, Zambia is quickly headed for a broad economic and financial crisis.”
Not everyone is convinced the situation is as murky. There is “no hard evidence” that the problem of hidden loans in Zambia is greater than other countries with similar credit ratings, according to Gregory Smith, a sovereign-debt strategist at Renaissance Capital who was previously a World Bank economist in Zambia. Still, the rising debt and the cost of servicing it are the country’s biggest economic challenge, he said in a note April 5.
Finance Minister Margaret Mwanakatwe said on Friday she was carrying out a debt-sustainability analysis to move the IMF negotiations forward and also wants to “reprofile” $3 billion of outstanding Eurobonds. The government is already seeking to restructure bilateral loans from Chinese state companies, which Nomura estimates at about $5 billion.
The main hurdle Zambia has encountered in securing an IMF loan is its future debt contraction plans, according to Mukuli Chikuba, permanent secretary at the Ministry of Finance.
“The issue is, going forward, what do you borrow, what don’t you borrow,” he said Sunday on state-owned television. “What we’ve said is: give us time, we’ll pull back.”