Barclays warns of debt default

ZAMBIA can avoid defaulting on debt repayment by engaging in a clear change in policies accompanied by an International Monetary Fund (IMF) programme in the near term, Barclays Bank has said. e bank indicates in its report on emerging markets research that Zambia could avoid defaulting on debt by changing the current policies as they are likely to result in a liquidity shortfall by 2020. Based on assumptions and calculations conducted, the bank says, the current market prices are broadly aligned with the scenario in which Zambia faces default in 2020, but then restructured debt under an IMF programme. “ e market appears to be pricing a high likelihood of a credit event in Zambia, given that prices of Zambia’s eurobond have now fallen to the mid-60s and cash price convergence across the curve is almost complete. “We present three possible scenarios for Zambia’s debt servicing trajectory. In the optimistic scenario, we think default can still be avoided. However, this scenario would require a clear change in policies accompanied by an IMF programme in the near term,” Barclays Bank says. e bank also says in the report risks to Zambia’s credit at current prices have become balanced, therefore upgrading Zambia from underweight to market weight. “ e alternative scenarios assume a muddle-through on current policies, which would likely result in an FX liquidity shortfall by 2020. “In this case, the two sub-scenarios would be (i) that Zambia is then forced into IMF cooperation eventually - which we believe would involve private sector involvement in a broader debt restructuring at that point; or (ii) a ‘disorderly’ default,” the bank says. e report says Zambia’s debt repayment capacity has been signi cantly eroded in recent years. e bank says while a debt restructuring is not yet unavoidable; Zambia appears to be on a path to defaulting and a balance of payments crisis. “In this note, we explore three di erent potential scenarios and their implications for creditors. e country’s predicament may o er a template for the treatment of other SSA countries facing questions around public debt sustainability and with a debt pro le that is dominated by non-Paris Club creditors, in particular the Chinese sovereign or other Chinese-related entities,” Barclays Bank says.