Zambia’s default risk highlights Africa’s debt woes
Facing financial difficulties aggravated by the coronavirus disease (COVID-19) pandemic, the southern African nation of Zambia appears headed for a default on debt owed to private investors. One of the world’s top copper producers, Zambia for years has been heavily indebted but now could get an undesired reputation for financial unreliability if a group of investors who hold $3 billion of the country’s eurobonds insist on payments that have come due. Zambia seeks a holiday of six months, but the bondholders’ final decision is pending.
The cash-strapped country is a strong example of the debt distress for other governments in Africa even as they try to focus limited resources on urgent problems such as healthcare and education. How Zambia fares will be watched by other nations that owe large amounts not just to private bondholders but also to commercial banks and state lenders such as China.
A default on private debt is damaging in the eyes of investors, and credit rating agency Fitch downgraded Zambia to almost junk status after the government sought to delay interest payments to bondholders in September. Zambia’s looming default “definitely sends a wrong signal in the eyes of investors,” said Stephen Kaboyo, a Ugandan analyst who runs the asset management firm Alpha Capital Partners.
“There’s always peer comparison,” he said. “They ask themselves, ‘ Who is next?’”
Abebe Selassie, the director in charge of Africa at the International Monetary Fund, sought to allay the concern in a news conference on Oct. 22, saying he hoped the market would differentiate Zambian assets from others in Africa.
“That’s what we’re seeing so far, and I hope that will continue to be the case, as is the case elsewhere,” he said.
The South Africa-based research firm NKC African Economics in an assessment related to Zambia’s troubles said it saw “moderate” contagion risk in the broader region and warned that pandemic-related disruptions to global trade could raise default risk in the entire sub-Saharan African region.
A “prolonged external shock may disrupt refinancing efforts” in Kenya, Ghana and Senegal in the debt cycle that begins in 2021, it said.
Many sub-Saharan African countries, from Cameroon to Kenya, have issued eurobonds over the years, amassing debt that is maturing at a time of rising financial burden amid the pandemic.