A local think tank has warned that Zambia risks defaulting on repayments of existing Eurobond loans.
In a report published today titled “A Cautionary Tale of Zambia’s International Sovereign Bond Issuances”, ZIPAR Executive Director Pamela Nakamba-Kabaso says action must be taken now to avoid the risk of defaulting on the Eurobonds, which would have a very detrimental impact on the economy and affect Zambia’s standing among international investors.
Dr Kabaso pointed out the challenge of having to repay the loans in full within a very tight two year period between2022-2024 when the respective ten-year bonds mature.
She observed that significant repayment risks will arise if there are adverse changes in the domestic or international market conditions before these dates.
‘ZIPAR argue that borrowing from international markets can be beneficial if invested wisely, and are important to plugging the financial gap now that Zambia, as a lower middle income country, is less able to access low interest loans from the donors,’ Dr Kabaso said.
She continued, ‘Eurobonds strengthen transparency and macroeconomic discipline because Zambia now faces scrutiny from international investors and credit rating agencies. However ZIPAR feels that significant repayment risks will arise especially that Zambia’s exposure to currency volatility is high because of its heavy reliance on copper for foreign exchange and recently the price of copper on the international market has declined owing to weak demand from major consumers such as China.’
Dr Kabaso said the report draws attention to the fact that, because the bonds are denominated in US dollars, the recent depreciation of the Kwacha has made the interest payments even more expensive.
‘The recent depreciation of the Kwacha against major international currencies has increased debt servicing costs, which may crowd out social sector spending. The reverberations of the recently-reversed mining tax regime are still being felt by various stakeholders and has affected mining output during the first half of the year,’ she observed.
‘The fiscal deficit as a result of the reversal of the 2015 mining tax regime may be a lot higher than the projected K2.3 billion due to the forward and backward linkages of the mining sector. The country may have to borrow further to plug this deficit,’ she stated.
The Zambian government borrowed US$750 million in 2012 and US$1 billion in 2014 from the international financial markets. Each year, interest payments on existing Eurobonds will gobble up in excess of US$125 million.
The report further points out that Zambia is on a learning curve and has only limited experience in managing Eurobonds, a market-based form of financing.
Dr Kabaso said ZIPAR has since recommended achievement of fiscal discipline aimed at reducing the need to borrow more and broadening its tax base, strengthen revenue collection and contain expenditure.
She said ZIPAR has also recommended that government considers setting up a Sinking Fund to help repay bonds in 2022 and 2024 saying putting aside funding each year into a sinking fund for the two Eurobonds will insulate against future adverse macroeconomic conditions.
Dr Kabaso said refinancing the second Eurobond, but only at the right time especially that the second bond was obtained on relatively unfavourable terms and could be replaced with another bond with lower interest rate and longer maturity but noted that this is only likely to be possible once the overall fiscal position improves.
‘Improve existing institutional and legal bottlenecks in debt management including the finalisation of the Medium Term Debt Management Strategy and the reorganisation of the debt office to enhance its risk portfolio monitoring and analysis,’ she said.
And ZIPAR Research Fellow Shebo Nalishebo said, ‘the Zambian government’s use of Eurobonds has some advantages. The borrowed funds have mainly been invested in the energy and transport sectors.’
‘These are infrastructure projects that, it is hoped, will help increase economic growth, job creation and increase government tax revenues in the future. However, Zambia also needs to manage the risks of greater borrowing,’ Mr Nalishebo said.
‘Looking at countries around the world which have defaulted on their sovereign debt shows just how damaging this can be. Tough decisions will need to be taken to ensure that Zambia manages the risks. These include measures to reduce the high fiscal deficit, setting up a sinking fund and looking at the case for refinancing the second Eurobond.”