The Standard Bank Group which trades in Zambia as Stanbic Bank has forecast that foreign exchange reserves in Zambia could decline further to US$1 billion before the end of June.
And the Standard Bank Group says in order to raise the funding required to repay Eurobond maturities, presuming that refinancing is not an option, Zambia would easily sell some of its assets.
Bank Head of Africa Research Phumelele Mbiyo said the tentative forecast is based on discussions that the bank officials had with the Bank of Zambia during a recent visit to Lusaka.
In the report titled Déjà vu, the Bank says the amount of external debt service payments was sufficiently large to suggest that foreign exchange reserves could be closer to US$1.2bn or even US$1.1bn by the end of March.
“What was conspicuously lacking was a plan to quell this persistent drain. Of course, operationally the BOZ would buy Forex from the market in order to accumulate the Forex it requires to continue servicing external debt. We were left with the impression that policymakers are bemused by the market’s obsession with whether the government would seek an IMF-funded program,” the report read.
The report stated that it is clear that the government does not see the level of the fiscal deficit as an issue and neither has it ever seen it as a key lever with which it could arrest the deterioration of the Balance of Payment.
“Indeed, during our discussions with the Finance Ministry it was clear that the government is still keen to borrow as much as is feasible, whether domestically or externally, in order to continue with the government infrastructure development program. However, during our meetings last month the Finance Ministry conceded that the persistent decline in Forex reserves, combined with mounting external debt service payments, raised the probability that a liquidity crisis might develop” it read.
The Bank said setting aside the fact that actual debt service payments in 2018 exceeded the budgeted number, it is worth pointing out that budgeted debt service payments in 2019 are nearly as much as the level of Forex reserves at the end of 2018.
“Having conceded the increasing likelihood of a liquidity crisis, the Ministry of Finance did not leave us with any confidence that anything is being done to avert such a crisis. Of course, there has been much reporting in the media that the government might be engaging Chinese lenders to restructure some of the loans that the government obtained from them. However, while acknowledging these media reports, representatives from the Finance Ministry could not confirm that anything of the sort is being worked upon. Neither did representatives at the Bank of Zambia,” it said.
The bank said over the past 4 weeks, they visited Zambia on a few occasions, meeting policymakers and some businesses.
“From the meetings we left with a rather strong conviction that a reacceleration of economic growth was unlikely to materialise in the next 2-3 years. Notably, in a lot of conversations with businesses, be it small enterprises or large corporations, the topic of government arrears kept coming up. Many businesses are clearly feeling the pinch as a result of working capital challenges that government arrears have brought about,” it said.
“This is either directly for those that are owed VAT refunds or indirectly for those supplying to small and medium enterprises that are themselves supplying to the government, and have not been paid. From a policy perspective, it seems as if there is a broad acknowledgement of the difficult BOP adjustment that the economy is going through. Strangely though, there is hardly any discussion of any policy measures being taken to end the erosion of external buffers,” it observed.
And the Bank says in order to raise the funding required to repay Eurobond maturities, presuming that refinancing is not an option, Zambia would easily sell some of its assets.
“As pointed out above, the government acknowledged the shocks that hit the economy between 2014 and 2016. In response, it crafted an economic program that it sincerely believes is addressing the consequences of that shock. Investors questioned the Finance Ministry on how it would fund the maturities of the Eurobonds, with the first maturity due in 2022. The Ministry pointed out that while a liquidity problem might develop, there would not be a solvency problem,” it said.
“The government has plenty of assets, including ownership stakes in mining companies, whose value far exceeds the value of its liabilities. In order to raise the funding required to repay Eurobond maturities, presuming that refinancing is not an option, it would easily sell some of its assets. This was the first time that we heard policymakers raising the possibility of asset sales to repay maturing debts” it observed.
The Bank also charged that the IMF program still looks highly unlikely in the near term.
“We have not been convinced that this was likely to materialise anytime soon. Following our trip, we are still not convinced that the government sees any economic problem that would be solved by an IMF-funded program. Clearly, given that the core objective of Zambia Plus was resource mobilisation and well targeted spending, an IMF-funded program is irrelevant. After all, the IMF would insist on the government addressing the imbalances that fiscal policy conduct has exacerbated.”