The first African country to default on its debt in the Covid-19 era was Zambia which opted to leave a $42.5 million eurobond repayment last week.
A key rating for Zambia was downgraded from CC to Restricted Default by Fitch Ratings on Wednesday. Its equivalent rating had already been reduced by S&P Global Ratings for the country to Selective Default days before the end of a 30-day grace period and a creditor meeting on November 13. S&P Global Ratings said that the downgrade was based on the assertion of the Zambian government that it “will not make debt service payments.”
Based on the assumption that either missed repayments or a new restructuring plan would also result in two remaining eurobonds falling into default, Fitch also withdrew ratings on these bonds of Zambia.
Eurobonds are debt instruments denominated in a currency other than that of the issuer.
In recent years, issues predating the pandemic had resulted in the country’s debt profile coming down consistently, which left its creditors to wrangle about who should take losses on loans.
Zambia has found servicing repayments on its estimated $11 billion debt pile becoming increasingly difficult because of plummeting copper prices over the past three years and the country is the second largest copper producer in Africa which is also its main source of income.
Prior to the national debt of the country starting to spiral out of control, it has issued its last issued eurobond in 2015. The debts had been piled on as the country financed many of its large infrastructure projects from Chinese loans which were granted to the country as a part of China’s ambitious Belt & Road initiative.
As this made investors demand much greater clarity about Zambia’s Chinese debt obligations from the African country’s government and expressed concerns that the country will try and pay off Chinese loans with further debt financing and not service the creditors’ debts.
A potential International Monetary Fund bailout package for the country is now being watched closely.
The IMF would play a crucial role in any negotiations, said NKC African Economics Senior Financial Economist Irmgard Erasmus.
“We believe an orderly process towards a bond swap agreement will require the mediating role of the IMF in its capacity as policy linchpin, which in turn rests upon the assumption that the Fund will support Zambia under a formal Extended Credit Facility (ECF) programme,” Erasmus wrote in a note Thursday.
“The absence of this linchpin risks a prolonged, acrimonious restructuring process which will be accompanied by a protracted growth shock.”
A delegation from the IMF is set to be travelling to Zambia in early December.
However according to Erasmus, it is expected widely that greater progress on Zambia’s liability management would be demanded by the IMF representatives before any formal offer on a bailout program is made.
It is quite uncertain whether it would be possible for Zambia to restructure its eurobonds or other debt instruments quickly to address the potential concerns of creditors, said Robert Besseling, executive director of risk consultancy EXX Africa.
(Adapted from CNBC.com)