Zambia’s Economy on the Brink After Bondholders Reject Request to Defer Interest Payment

Bondholders have rejected Zambia’s request to defer interest payments putting the Southern African country in a position where it must choose between defaulting and punishing austerity.

 

President Edgar Lungu’s government had asked the holders of their Eurobond to defer interest payment dates from October 14, 2020, to April 14, 2021. When Zambia failed to pay in October, the bondholders agreed to an extra month during which there would be a meeting to decide Zambia’s fate. 

 

The bondholders have since decided there was no viable payment plan provided and would therefore not grant the six-month grace period.

 

The decision by the bondholders gives Zambia two options, to either pay the Eurobond holders’ $42.5 million interest coupon or to refuse conditions for more transparency on loans and head for default.

 

Failure to pay interest is already biting for Zambia. BNP Paribas Securities Services, which is a player in the bonds market indicated in its product news dated November 13, 2020, that the Bank would no longer advise customers to buy Zambian treasury bills and bonds.

 

Mining remains the mainstay of the Zambian economy, representing its hope to come out of heavy international debts (C) Biscommunity

 

The summary of the notice indicates that due to the current situation in the market, Zambia has been suspended from the global custody offer by Paribas Securities Services with immediate effect.

 

“Given the instability on the Zambian market and reported incidents, we cannot guarantee anymore the safety of assets deposited in Zambia and are suspending any transactions with immediate effect until further notice”, read the notice.

 

The Zambian government, however, remains hopeful that the bondholders will reconsider and allow for a loan restructuring plan.  

 

Finance Minister, Dr. Bwalya Ng’andu says that while the government regrets the bondholders’ refusal to approve the requests for an extension of the interest payment deadline, Zambia remains committed to finding a consensual and collaborative resolution to debt sustainability issues.

 

In a statement availed to Timescape Magazine, Dr Ng’andu promised to continue with dialogue and information sharing.

 

“In light of the fiscal and economic challenges the country faces, Zambia will continue to engage in constructive dialogue and share information with the ad hoc committee of bondholders and all other creditors in order to arrive at a resolution that would gather support from all its creditors,” he says.

 

Zambia is currently struggling to pay its creditors and has so far negotiated debt service relief, as the country looks to restructure its $12 billion in external debt.

 

Dr. Ng’andu has further expressed confidence that as government continues to share information with all creditors, including the bondholders’ ad hoc committee’s advisors, there would be an appreciation that allowing a grace period to enable Zambia time for a sustainable debt trajectory is in everyone’s interests.

 

Among the available options is the negotiation of a bailout from the International Monetary Fund (IMF) which would come with conditions such as austerity, a demand that the Zambian government rids itself of corruption and that data on debts with China are shared. 

 

Meanwhile, economist Noel Nkoma says it is sad that international money markets have started to respond harshly to Zambia’s debt situation.

 

Essentially no custodial services for cross border securities. Simply explained,  investors who usually subscribe or participate in GRZ (Government of Zambia) Bonds and Treasury Bills auctions are being advised that you will do so at 'owners risk" as they cannot guarantee that you will cash-out in foreign exchange currency. So, Treasury Bills subscriptions will now be impacted due to no participation by offshore investors,” Mr. Nkoma noted.

 

In addition, other stakeholders are of the view that the country has not learnt how to deal with international institutions and business entities. The government’s frantic efforts to create the impression that a deal was secured with the Chinese could also be blamed for the current situation.