The clock is ticking for Zambia to convince reluctant bondholders to accept an interest-payment holiday while it works out a debt-restructuring strategy.
If investors refuse Zambia’s request for a six-month standstill in a key vote today, it may become the first African nation to default since the onset of the coronavirus.
That could set a precedent for how cash-strapped governments treat private and Chinese creditors.
Zambia is not making it any easier for bondholders to give it breathing space.
Days after the government said it didn’t have the cash, it skipped a $42.5 million coupon payment — only for Finance Minister Bwalya Ng’andu to tell lawmakers the Treasury could have paid if it wanted to.
That may leave investors doubting the government’s will to tackle its debt problems in the run-up to elections in August.
“Zambia may very well be the most prominent battleground that this tension between creditors plays out,” said Irmgard Erasmus, an economist at Paarl, South Africa-based NKC Africa Economics. “Eurobond holders, in particular, are certain to use all the weapons in their arsenal to limit moral hazard to the rest of sub-Saharan Africa.”
Zambia skipped the coupon on the recommendation of its advisers, according to Dr Ng’andu.
“They were of the strong view and opinion that if we pay we were going to create a very hostile environment within which to negotiate with other creditors,” he told lawmakers Oct. 15. “Because, we would have departed from the principal of pari passu.”
A group that holds about 40% of Zambia’s $3 billion in outstanding Eurobonds has already said it won’t support the proposal.
The government has a 30-day grace period to make the interest payment it missed last week before a default event occurs, which would allow bondholders to demand immediate repayment of the principal.
Dr. Ng’andu, who started the job last year, needs to balance the competing interests of Eurobond holders and mainly state-owned creditors from China, to whom Zambia owes even more money.
Eurobond holders are demanding greater transparency and an endorsement from the International Monetary Fund.
Zambia says it is treating all creditors equally.
The government hired Lazard Freres as financial advisers in May to assist with what it called a liability management exercise of its then $11.2 billion in external debt.
The copper producing nation’s debt has since shot up to almost $12 billion, and a messy default is becoming increasingly probable.