Zam­bia driven to­wards IMF

Sell off puts pres­sure on coun­try to sta­bilise its fi­nances

Zambian Business Times - - FISCAL AND DEBT MANAGEMENT -

The emerg­ing-mar­ket sell­off is pil­ing pres­sure on Zam­bia to sta­bilise its fi­nances and strike a bailout deal with the IMF.

The cop­per pro­ducer’s Eurobonds were strug­gling even be­fore sen­ti­ment to­wards devel­op­ing na­tions turned bear­ish around mid-April as the dol­lar strength­ened and US- China trade ten­sion wors­ened. Those fac­tors, along with con­ta­gion from Turkey’s fi­nan­cial cri­sis, have made the pain even more acute.

Zam­bia’s Eurobonds have lost 10% in Au­gust, more than any of the 75 coun­tries in the Bloomberg Bar­clays emerg­ing mar­kets USD sovereign bond in­dex.

That has ex­tended their de­cline to 23% in 2018 and sent spreads over US trea­suries soar­ing to more than 1,000 ba­sis points. The na­tion’s cred­it­wor­thi­ness has been down­graded twice in the past month.

S&P Global Rat­ings cut the for­eign-cur­rency rat­ing to B-, six steps into junk ter­ri­tory, last week, say­ing that the bud­get deficit and pace of debt ac­cu­mu­la­tion would be higher than it pre­vi­ously fore­cast. Moody’s In­vestors Service low­ered its as­sess­ment to Caa1 be­fore that.

Yields on Zam­bia’s $1bn of notes ma­tur­ing in 2024 had risen 28 ba­sis points to 14.22% by 3.50pm in Lon­don on Tues­day, ex­tend­ing their in­crease in 2018 to 775 ba­sis points.

"Zam­bia’s yields could rise fur­ther be­cause its fun­da­men­tals are still very frag­ile," said Kaan Na­zli, a strate­gist in The Hague with Neu­berger Ber­man, a $300bn money man­ager that owns Zam­bian Eurobonds. "It’s not a place that in­vestors would rush into even if emerg­ing mar­kets be­come pop­u­lar again. People will be cau­tious about Zam­bia un­til it pro­duces bet­ter num­bers or gets an IMF deal."

ZAM­BIA’S YIELDS COULD RISE FUR­THER BE­CAUSE ITS FUN­DA­MEN­TALS ARE STILL VERY FRAG­ILE

Zam­bia’s rev­enue streams are strong enough to avert a de­fault at least un­til 2022, when $750m of Eurobonds ma­ture, said Na­zli.

A spokesper­son for the min­istry of fi­nance in Lusaka did not im­me­di­ately re­ply to an e-mailed re­quest for com­ment.

Zam­bia was one of Africa’s most pro­lific bor­row­ers in the Eurobond mar­ket be­tween 2012 and 2015, sell­ing $3bn of debt.

It also took on loans from Chi­nese state firms, some of which it is try­ing to rene­go­ti­ate. The govern­ment’s debt load will rise to 66% of GDP in 2018, more than triple the fig­ure a decade ago, ac­cord­ing to the IMF. The US-based lender says Zam­bia’s 2018 bud­get short­fall will be al­most 8% of GDP.

The debt prob­lems have been ex­ac­er­bated by trade wars. Cop­per, Zam­bia’s big­gest ex­port, has been among the com­modi­ties hard­est hit by US Pres­i­dent Don­ald Trump’s fight with Beijing. Prices have slumped 17% since peak­ing in June.

It is also one of the more vul­ner­a­ble coun­tries if out­flows from African bond mar­kets pick up as the dol­lar rises, thanks to rel­a­tively high for­eign hold­ings of Zam­bian kwacha debt, ac­cord­ing to Mark Bohlund, an an­a­lyst at Bloomberg Eco­nom­ics in Lon­don.

Talks with the IMF have dragged on for months. The min­istry of fi­nance said in a state­ment on Fri­day that the two sides have a "healthy and in­tact" re­la­tion­ship and that it is car­ry­ing out "ac­tions re­quired to fa­cil­i­tate the recom­mence­ment of dis­cus­sions for an IMF-sup­ported pro­gramme".

"With­out fur­ther steps to curb spend­ing and limit non-con­ces­sional bor­row­ing, the like­li­hood of IMF sup­port in the near term ap­pears low," Maria Paola Figueroa, an econ­o­mist at the In­sti­tute of In­ter­na­tional Fi­nance in Wash­ing­ton, said in a re­search note on Au­gust 23.

"Amid dwin­dling for­eign re­serves, and in the ab­sence of an IMF pro­gramme, the econ­omy re­mains highly vul­ner­a­ble."

"There doesn’t seem to be much ur­gency at the mo­ment from Zam­bian of­fi­cials to get an IMF pro­gramme in place," said Brett Row­ley, a Los An­ge­les-based man­ag­ing di­rec­tor at TCW Group.

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