Zambia has warned it is ready to become the first African country to default as a result of the coronavirus pandemic if investors in its $3bn worth of US dollar bonds reject a request by the southern African nation to suspend payments.
Africa’s second-biggest copper producer, which is attempting to restructure its $12bn of external debt, has become a crucial test of global efforts to help emerging nations find debt relief as the pandemic devastates their economies.
Despite the threat of a default, bondholders, who are due to decide next week whether to accept the government’s request to suspend interest payments for six months, said they planned to reject the proposal.
“Should Zambia fail to reach an agreement with its commercial creditors . . . the republic, with its limited fiscal space, will be unable to make payments and, therefore, fail to forestall accumulating arrears,” it said in a statement.
Zambia’s bonds, which are due in 2024, fell more than 3 per cent to 46 cents on the dollar on Wednesday after the default warning. It is due to pay more than $42m of interest on the bonds on Wednesday. It would have a grace period of up to 30 days to make up a missing payment before the bonds were officially considered to be in default.
Creditors’ reluctance to accept the suspension in part stems from concerns that not all creditors are being treated equally. Chinese debts total about $3bn. Some Chinese creditors have pressured Zambia to pay their share of about $200m in arrears on its Chinese debts before they agree to suspend future payments, a demand that Lusaka is resisting.
Holders of the US dollar bonds have complained that Zambia, which is also seeking an IMF programme, has not disclosed enough information about the Chinese debts and its wider plans to rein in public finances.
“We have yet to receive enough details from Zambia officials to vote on the consent,” said Kevin Daly, a fund manager at Aberdeen Standard Investments and a member of a committee of Zambian bondholders that owns enough bonds to reject the debt suspension proposal
“Having a dialogue would be more constructive than issuing press releases,” Mr Daly added. “Two big concerns we have are the lack of clarity on what debt relief they are getting from other creditors, and the lack of a medium-term fiscal framework to put the debt back on a sustainable path,” he said.
“The government has provided no credible medium-term framework that explains how the country intends to address the country’s longstanding macroeconomic imbalances and restore debt sustainability,” said one hedge fund investor, who did not want his name to be published.
Bondholders wanted an agreement to suspend repayments from all of Zambia’s creditors, including Chinese and other lenders, said Polina Kurdyavko, head of emerging market debt at BlueBay Asset Management and a member of the committee. “Until we get to that point, it’s counterproductive to consent to an amendment without a plan in place,” she added. “We would not be fulfilling our fiduciary duty to our investors.”
Zambia has said it is seeking equal treatment for all creditors. It said it needed the suspension “to design a sustainable and equitable debt management strategy” as it pursued negotiations with the IMF.
In the statement, it said it intended to continue paying debt “for a few priority projects that have an immediate economic and social impact” even as most other payments would be halted. It also promised to give details of these projects.