Zambia’s default recovery can weather the storm of opaque Chinese debts, analysts say

By David Whitehouse
Posted on Friday, 1 October 2021 16:23

Zambia may have borrowed more from China than previously thought under former President Edgar Lungu. REUTERS/Jason Lee

A new report, which suggests Zambia’s debts to China are much higher than previously disclosed, is unlikely to unwind the rally in the country’s eurobonds since the election of Hakainde Hichilema as president in August, analysts say.

The report from the Johns Hopkins China Africa Research Initiative (CARI) estimates that total Chinese public and publicly guaranteed debt at the end of August stood at $6.6bn, nearly double the officially disclosed amount of $3.4bn. CARI estimates that at the end of 2019, Zambia’s loan commitments to all Chinese creditors were at about 4% of gross national income, versus an African average of 10%.

Zambia defaulted on its eurobonds in November 2019, but Hichilema’s election victory in August this year has prompted a rally in the country’s traded debt.

Zambia’s 8.97% eurobond – which is due in July 2027 – climbed from 67¢ on the US dollar at the start of August, to a peak of around 79 in early September. The bond dipped back below 76 after the CARI research was published this week.

  • The report “doesn’t add that much that we didn’t really know,” says Mark Bohlund, senior credit research analyst at REDD Intelligence in London.
  • “It has always been clear that a transparent review of Zambia’s external debt would be a crucial step in the G20 Common Framework process and that there was a substantial part of private-sector Chinese debt in addition to the official-sector debt.”
  • Staff from the IMF are currently on a technical mission to Zambia, which concludes on Friday 1 October. It seeks to understand the new administration’s immediate reforms. Hichilema says his government will reduce the fiscal deficit, improve debt management and root out corruption.

Hands tied

“We expect that the new regime’s strong focus on a more pragmatic, transparent approach to policy-making will greatly aid the fund representatives in gaining greater insight into the true spectrum of the debt quagmire,” says Irmgard Erasmus, senior financial economist at Oxford Economics Africa in Cape Town.

  • “We don’t believe the latest CARI report will derail the new administration’s efforts to clinch a deal with the IMF,” Erasmus says.
  • “All of the actions taken by the Hichilema administration to date point towards a willingness to address the ‘inherited’ problems from the previous regime.”
  • The early signs show “a strong internal focus to not only clean house, but also allow IMF representatives greater access to the debt and fiscal data of [the] central government and the extra-budgetary units.”
  • The administration of ex-president Edgar Lungu alluded to this greater transparency, but had vested interests in limiting access to credit information, Erasmus says. Still, there remains an “arduous exercise to bring off-balance-sheet activities to book partly as a result of poor auditing practices,” she says.

For Hichilema, the challenge will be to avoid the temptation to use opaque debt for his political advantage. As Deborah Brautigam at CARI says, “educating Zambia’s population, that in some cases paved roads will be beyond the country’s means, could be a task for the new administration.”

According to Brautigam, Zambia’s competitive democracy is one reason for its over-indebtedness, with the willingness of successive governments to over-borrow to win votes, leading to a ‘tragedy of the commons’ under which individuals have an incentive to overuse a common resource, in this case Zambia’s capacity to borrow. A crucial task, Brautigam says, is for the new government to find ways of ‘binding its own hands’ so that the tragedy is not repeated.

Bottom line

Hichilema’s political will, to achieve transparency rather than the exact amount owed to China, holds the key to rebuilding investor confidence in Zambia, say analysts.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options