Zambia’s default shows new approach needed for Chinese debt

The Zambia Bondholder Committee said on November 16 that the country’s decision not to pay a coupon on the outstanding US dollar bonds by November 13 is “unnecessary” and “risks establishing a more adversarial backdrop to future discussions with bondholders.”

The committee, whose members hold more than 40% of the total amount of Zambia’s outstanding Eurobonds, says have been no direct discussions between bondholders and the authorities to date. There is therefore “no basis to conclude that the authorities intend to treat bondholders on an equitable basis”.

Zambia’s failure to convince bondholders “hinged on the government’s refusal to report transparently on its obligations to different creditors,” says Nick Branson, director at Gondwana Risk in London. The country “now finds itself in the invidious position of having to comply with even more onerous levels of transparency before it can begin the long process of restructuring loans and eventually regain access to global markets.”

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Loans from China, non-fungible with the standards demanded by Western creditors, are part of the problem. When repayment problems arise, there is no way for Western institutions to know if they will be treated on an equal basis with Chinese state and private lenders.

• “Zambia should come clean on its Chinese public and private debt,” says Steve Hanke, a monetary policy expert and professor of applied economics at Johns Hopkins University in the US.
• “Zambia has been playing with smoke and mirrors on its Chinese debt, and its other creditors are rightfully fed up.”

‘Fair Burden Sharing’

G20 finance ministers and central bank governors have been trying to devise a generally applicable solution. On November 13 they published a “Common Framework for Debt Treatments” endorsed by the Paris Club of creditors.

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The framework says that debtors requesting relief will provide the IMF, the World Bank and creditors necessary information regarding all public sector debt. The aim will be to endure “fair burden sharing” between all creditors.

Critics doubt the framework will help much in the future.

• The International Chamber of Commerce said in an open letter on November 11 that the framework needed to encourage “deep, fair and comprehensive debt restructurings”.
• The framework “should not exclude or discourage the need for cancellations and write-offs in certain cases.” The alternative, argues the ICC, is “growth-crushing debt overhangs” and a “lost decade” for sustainable development.
• Yet under the framework, debt write-offs are in principle excluded.

Branson sees little hope of progress in the short term.  He notes the new framework requires debtor nations to undergo an IMF-World Bank Debt Sustainability Analysis.

• “The prospect of disclosing reckless borrowing and entering an IMF programme months before highly competitive elections is too politically toxic for President Lungu to entertain, thus precluding meaningful negotiations with creditors until the next government assumes office,” Branson says.
• At least there is little immediate danger of contagion. “Zambia’s inevitable train wreck has been coming down the tracks for a long time,” Hanke says.
• “Investors and rating agencies have seen it coming and put Zambia in a separate ‘no go’ zone some time ago. Investors can and do differentiate credit risks in Africa.”

Pre-election populism

Zambia faces formidable hurdles to regain economic stability. According to Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town, the country needs an economic reform plan that will reduce debt, reform taxation to ensure the primary fiscal balance improves, cut spending, shed dead weight from parastatal balance sheets as a move towards complete privatisation, and make the mining sector more attractive to foreign investment.

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Hanke’s preferred solution is for a currency board under which the kwacha would be fully convertible and backed 100% by US dollar reserves. “A currency board system would put Zambia’s politicians in a monetary straitjacket and impose a hard budget constraint on the fiscal authorities.” That, he says, is “just what the doctor ordered in Zambia.”

In political terms, that’s among the least likely outcomes. Erasmus notes the tension between the need for reform and political considerations ahead of elections in August 2021.

• The pre-election period “lends itself to a drift towards populist policies and attempted centralisation of power”, she says.

The Bottom Line

The long-term consequence of Zambia’s default may be to deter Western lending to countries where China is already a creditor.