Fitch downbeat on Zambia, IMF deal
RATING agency Fitch has warned that disagreements and prolonged negotiations with some private creditors over Zambia’s debt might push the eventual International Monetary Fund (IMF) deal into 2023.
It says the timelines issued by the Zambian government for the final IMF approval within the first half of 2022 is optimistic.
It says Zambia has just conducted an IMF/World Bank Debt Sustainability Analysis (DSA) which will be the basis of discussions within the creditor committee.
The rating agency added that the outcome of the creditor committee would be enshrined in a memorandum of understanding (MoU) outlining a proposed debt treatment.
“Zambia will then approach its private creditors to negotiate debt treatment on comparable terms. The government’s announced timeline anticipates the formation of the creditor committee, agreement with private creditors, and final IMF board approval of the ECF all within 1H22. Fitch believes that this timeline is optimistic,” it said in a note to investors.
It stated that disagreements among creditors or prolonged negotiations with private creditors could push the date of an eventual agreement back.
“Fitch believes that a sizable debt treatment will be necessary to bring Zambia’s debt to a level deemed sustainable by the IMF and Zambia’s creditors. Total public sector debt stood at the 108% of GDP (gross domestic product) at end of 2021 and we expect it to fall below 100% by 2023, as Zambia narrows its primary deficit. However, we forecast debt to increase to just under 500% of government revenue in 2022, above the ‘B’/’C’/’D’ median of 328%. Of this amount, US$14,7 billion (59% of GDP) is external debt,” it said.
“Eurobonds account for US$3 billion of Zambia’s debt, a high percentage of debt compared to other countries going through CF restructuring. The possibility of Eurobond holders rejecting the MoU’s terms brings risks to the timeline. Zambia has an additional US$4 billion in contracted but undisbursed debt, which is not included in the debt stock. Fitch expects about half of this contracted debt to be negotiated away.”
The “CCC” rating reflects that the Zambian government has continued to service its local-currency debt and has not announced any plans to restructure domestic debt as part of the Common Framework (CF).
Domestic banks and other institutions hold the majority of outstanding domestic debt; although the stock of non-resident investment increased in 2020 and 2021 and is now 28% of the total.
A domestic debt restructuring could create additional liabilities to the government, making it counterproductive.
However, the domestic debt stock is large at ZMW197 billion (48% of GDP). The size of the necessary overall debt treatment, as well as the size of the necessary fiscal adjustment, mean that sizable risks to domestic debt will persist.
And Fitch ratings have affirmed Zambia’s long-term foreign-currency issuer default rating (IDR) at RD and has also affirmed the long-term localcurrency (LTLC) IDR at CCC.
“The ‘RD’ rating reflects that Zambia has not serviced the bulk of its outstanding external debt since failing to make a Eurobond interest payment in October 2020. Subsequently, the government announced that it would stop servicing all of its external debt, excluding some priority project loans, and applied for debt relief under the G20 CF. In December 2021, the government reached staff-level agreement on an IMF programme, which clears the way for convening of an official bilateral creditor committee to discuss potential debt treatments.”