EDITORIAL: Painful lessons SA must learn from Zambia’s default
The default shows what happens when countries accumulate debt, especially in foreign currency
It is not often that Zambia is at the centre of global headlines.
The Southern African country and major copper producer is unfortunately getting attention for all the wrong reasons, as it edges towards what will be the continent’s first default on dollar debt since the start of the Covid-19 pandemic.
Depending on who you ask, Zambia is either a cautionary tale of what happens when over-borrowing is combined with economic mismanagement, or a brave victim of resisting pressure from unscrupulous lenders.
In that context, it could have done without President Edgar Lungu’s abrupt sacking of Denny Kalyalya as central bank governor in August. The move was especially reckless coming just as the government was seeking to negotiate a rescue package with the International Monetary Fund (IMF). It’s no surprise that its negotiations with the IMF, which has granted SA a $4.3bn (R72bn) loan as part of efforts to support countries dealing with the challenges from Covid-19, have come to naught
A pre-condition for IMF involvement is that Zambia first reach an agreement with private creditors as the Washington-based institution will not lend to a country that it thinks is on an unsustainable fiscal trajectory.
Zambia, which first entered the bond market eight years ago, on Tuesday, again asked for a deferral of its debt payments until April 2021, with its creditors, that originally rejected a consent solicitation, standing their ground. Bloomberg reported that the country skipped a $42.5m interest payment on Wednesday. It’s not yet officially in default as there is a 30-day grace period for it to make good on its commitment.
Trade in its dollar bonds, which are valued at less than half their face value, however, indicates that a default is all but a foregone conclusion.
While it would be tempting to blame Zambia’s woes on the coronavirus, which wiped out tourism and depressed demand for its commodity exports, the country was already stressed before the outbreak. Its 2019 fiscal deficit was well above target and persistent shortfalls had pushed debt as a percentage of GDP to 88%, from 32% five years earlier.
Zambia is far from being a systemic economy in the region, let alone the world, so the repercussions of a default are unlikely to be felt far and wide. But it’s likely to prove a test case of how creditors — official and private — deal with others in distress.
SA’s one key strength
It also holds lessons about what happens when countries quickly accumulate debt, especially in foreign currency.
As concerns rise about SA’s own debt position and the ability of local banks, which are taking in more and more, to absorb government’s growing bond issuances, this is something we need to look at closely. Among its many weaknesses, SA has one key strength in that most of its debt is in rand.
Zambia only entered the dollar bond market in 2012, and after subsequent sales in 2014 and 2015, it has now grown to about $3bn. It owes a similar amount to China, and this has been a significant barrier to getting an agreement with other creditors, who suspect that they won’t be getting equal treatment.
In a report in March, Fitch Ratings noted that Zambia’s external debt, at $11.1bn, meant that it faced foreign-currency debt servicing that exceeded its international reserves. The level of growth in foreign currency debt left the country extra vulnerable because of the kwacha’s decline to record lows.
Zambia should also be a reason to take with a pinch of salt the idea that deficits don’t matter, and a warning not to draw the wrong lessons from the fact that even the IMF nowadays is advocating government spending and warning against the premature removal of fiscal stimulus.
What gets lost is that the advice was meant for countries that “can” do it. In other words, those that are able to borrow at record-low interest rates. Unfortunately, finance minister Tito Mboweni’s medium term budget policy statement later in October will show that we don’t belong to that club.
We will therefore ignore the Zambian lesson at our own peril.
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