‘CHINESE LOANS HOLD KEY’
TWO American Banks say Zambia will not go into an economic crisis and will manage to service its debt by 2022 if it manages to negotiate payment terms with the Chinese as investors will enjoy high yields available.
The two banks, Merrill Lynch and Bank of America, said salvation lies in the settlement with the Chinese although a standby IMF facility would still be required.
In their report dated April 26, 2019, the two banks have however warned that the country’s situation was likely to get worse before recovering, forcing authorities to get to the IMF just after the 2021 elections to refinance its Eurobond.
“If Zambia is able to muddle through (even as the country’s credit profile deteriorates), investors could enjoy the very high yields available currently since it should be able to service its debt. However, the lack of fundamental improvement catalysts would mean the bonds would likely stay range bound in price terms.
“If Chinese disbursements continue, we would still expect debt servicing to continue. Our largest concern from our strategy perspective is that the authorities will only turn to IMF when the situation reaches a critical point with bonds likely to face even heavier pressure before that time.
“We think it is very likely that Zambia will need to turn to the IMF in 2021/2022 in order to refinance the 2022 US$ 750 million,” reads the report in part.
The bank also suggests that Zambia’s debt by 2021 will undeniably be high but that it would still be comparable to other countries that had agreed to IMF programmes in recent years and that if the country agreed to the IMF bailout, the pressure would be less.
“We have assumed that the rollover of upcoming debt maturities would be easier to negotiate and still see only half of external principle payments being met out by 2022. Current delays, increasing debt servicing, and strain on reserves, however, suggest negotiations may not be going smoothly.
“We emphasise that the underlying (ex-capex) deficit in Zambia is relatively contained. With 1-2 percent capex, we think that Zambia would be able to make further adjustments by clearing arrears and reducing subsidies, which are the other key issues that have been the focus of the IMF discussions.
‘‘Instead of haircuts, we think authorities will most likely need to extend maturities to solve liquidity pressures nearer 2022. With Zambian bonds trading around 70 currently, there would be substantial upside from current levels with maturity extensions, or even haircuts of 20% for example. The tail-risk to our view is that Zambia is not willing to adjust and does not undertake an IMF program. We see this as the least likely outcome,’’ reads the report.