Zambia driven towards IMF
Selloff puts pressure on country to stabilise its finances
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.