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1. Towards 2022: Options for paying back Zambia's Eurobond Debt

Author:
Mbewe Kalikeka, Shebo Nalishebo, and Florence Banda-Muleya
Publication Date:
12-2019
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
On 20th September 2022, Zambia’s first Eurobond will mature. The Government will be required to settle its principal payment amounting to US$750 million in full. Twenty months later in April 2024, the Government will have to settle the second Eurobond worth US$1 billion. The third US$1.25 billion Eurobond will be paid back in three instalments in July of 2025, 2026 and 2027. With less than three years before the first Eurobond matures, there is no clear indication of how and where the money to pay back these Eurobonds is going to come from. This paper considers several options that will mitigate the possibility of a default when the principal payments on the Eurobonds are due. The lack of a payment strategy has made the bondholders jittery about whether they will get their money back. Bondholders have communicated their consternations by dumping the Zambian bonds which are perceived to be risky. With increasing yield rates on the three Eurobonds, of about 17% by end-September 2019, the market seems to have already priced in a default – only nations already in default, such as Venezuela, have yields as high as Zambia’s1. The yield rate is the barometer used to assess the risk inherent in the bond. In general, higher yields mean the bond has higher risk and corresponds to a decline in the value of the bond. There have been efforts made towards establishing a Eurobond Redemption Strategy, but its contents are yet to be publicised. Also, the failure to release the 2020-2022 Medium Term Expenditure Framework by September 2019, and the absence of the 2020-2022 Medium Term Debt Strategy to show a clear borrowing plan have added to the market apprehension. By just about every measure, the Zambian economic fundamentals are fragile. Growth is ailing, prompting the authorities to revise their growth projection targets from 4% to 2% in 2019. Agriculture has been in recession for several quarters now. The 2019 mining fiscal regime that has significantly raised the tax burden on mining companies to unsustainable and uncompetitive levels, coupled with reduced ore grades, has resulted in 8.4% reduction in mining value added in the second quarter of 2019. The electricity load management which commenced in mid-2019 continues to have adverse economy-wide effects. This has implications on revenue targets. Tax revenues in September 2019 were 17% lower than projected, a trend likely to continue at least up to the end of the year. Further, the recent weakness of the Kwacha is not helping either as it has increased the cost of external borrowing and debt servicing, making it prohibitively more expensive to service foreign-currency denominated loans, which include the Eurobonds.
Topic:
Debt, Economics, Markets, Public Debt, and Eurobonds
Political Geography:
Africa and Zambia

2. Scaling the Eurobond Debt Wall

Author:
Shebo Nalishebo and Florence Banda-Muleya
Publication Date:
11-2017
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
The writing is on the wall - Zambia is at a high risk of debt distress: The country risks defaulting on repaying the principal amounts of the three Eurobonds due during 2022-2027. A default could lead to exclusion from the international capital markets, a dented reputation which would culminate into a decline in Foreign Direct Investments and reduced credit to the private sector and credit rating downgrades. This would ultimately result in an economic contraction which would affect future payments and further compounding the default. Government has to pay back US$750 million in 2022, US$1 billion in 2024 and US$1.25 billion over 2025-2027. Between 2018 and 2022, Government will spend about US$237.4 million per annum in interest payments towards the three Eurobonds – this annual amount is about the same as the entire social protection budget in 2017. Policy measures have been put in place to manage the debt, but they seem inadequate: The measures include a debt management strategy that will guide borrowing decisions in the medium term. The Government has also signalled its intensions to set up a sinking fund and/or refinance the debt – essentially replacing the old loans with a new loan offering different, perhaps more favourable, terms. To set up the sinking fund, Government intends to set aside K100 million in 2018, K800 million in 2019 and K3.97 billion in 2020. But setting up the fund requires an excess of K6 billion per annum between 2018 and 2022. No clear indication has been given with regard to when refinancing will be considered. So the plans put in place may not be adequate to pay back the Eurobonds. Government should not wait until it is too late: In order to meet the principal and interest payments on the three Eurobonds, Government needs to start the strategies for paying back the Eurobonds sooner rather than later. Government has already lost time as a pay-back plan should have been instituted for the Eurobonds as soon as they were issued. But without any budget surpluses, and with foreign financing having somewhat dried up, Zambia has to look to more domestic resource mobilisation to raise the funds needed to pay back the Eurobonds.
Topic:
Government, Economy, Public Debt, and Eurobonds
Political Geography:
Africa and Zambia

3. A Cautionary Tale of Zambia’s International Sovereign Bond Issuances

Author:
Shebo Nalishebo and Albert Halwampa
Publication Date:
03-2015
Content Type:
Working Paper
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
In recent years, Zambia has been faced with the increased need to plug huge infrastructural gaps. However, the slowing down of bilateral and multilateral financing due to austerity measures in developed economies has made the country diversify its budget and project financing options by issuing Eurobonds. Eurobonds are commercial borrowings by governments in currencies other than their own - in Zambia’s case, the borrowing is denominated in US dollars. Since 2012, the Zambian Government has issued two ten-year sovereign bonds collectively worth US$1.75 billion mainly to finance infrastructure projects. Eurobonds bring with them opportunities for economic development, but there are risks. This report assesses the current legal and institutional frameworks governing borrowing from international capital markets in Zambia, including the role of credit rating agencies. It also examines the benefits, costs and risks associated with the issuance of sovereign bonds, including the cost and risk of sovereign defaults. It also proposes the mitigation of these costs and risks. Eurobonds offer African countries easy access to monies that are free from the stringent conditionalities that often come with the traditional concessional borrowing. Eurobonds also strengthen macroeconomic discipline and are used as a benchmark for pricing subnational bonds. If the borrowed funds are spent on projects that offer a greater scope for augmenting revenue earnings and creating employment opportunities, this would accelerate economic growth and reduce the high poverty levels that Africa faces.
Topic:
Economy, Economic Development, Public Debt, Bonds, and Eurobonds
Political Geography:
Africa and Zambia

4. Eurobonds Repayment: Limiting the Risks

Author:
Shebo Nalishebo and Albert Halwampa
Publication Date:
03-2015
Content Type:
Policy Brief
Institution:
Zambia Institute for Policy Analysis and Research (ZIPAR)
Abstract:
In recent years, the Zambian economy has been growing strongly and the country has increasingly been faced with the need to plug huge infrastructural gaps. However, the slowing down of bilateral and multilateral financing due to austerity measures in developed economies and the World Bank’s reclassification of Zambia as a lower middle income country has led financiers to divert concessional loans to other needy countries in the low income bracket. Consequently, Zambia has had to diversify its budget and project financing options by issuing Eurobonds which are commercial borrowings by governments in currencies other than their own - in Zambia’s case, it is denominated in US dollars. Since 2012, the Zambian Government has issued two ten-year sovereign bonds collectively worth US$1.75 billion to mainly finance infrastructure projects. These two bonds amounted to 37% of Zambia’s external debt in 2014. With an average coupon rate of 6.9%, the two bonds have bullet repayment structures, implying that lump sum principal payments will be paid at the end of their respective ten-year maturity periods. The coupon rate is the interest rate at the time of issuance. Notwithstanding the high interest payments of over US$125 million annually, the bullet structure of the two bonds may have significant repayment risks as the country is expected to pay out the US$1.75 billion within a two-year period (in 2022 and 2024). The country may experience difficulty in repaying or refinancing the face value at maturity if the money is not spent in activities with high economic returns and if there are adverse changes in its exchange rate or international market conditions. The risks are already on the horizon – the recent depreciation of the Kwacha has increased debt servicing costs, while the low copper prices have reduced the much-needed export revenues used to service debt. Has Zambia dug itself into another debt hole? What measures can be put in place to mitigate the risk of a pending default?
Topic:
Economy, Economic growth, Bonds, and Eurobonds
Political Geography:
Africa and Zambia