Some delayed thoughts on Zambia's Deal with Bondholders
By Grieve Chelwa
(I should have written this up last week but was delayed owing to travel to Accra, Ghana for a conference on Debt in Africa, where Zambia was top on the agenda.)
Last week Monday an announcement was made that the Zambian government had reached an agreement with holders of its Eurobonds to restructure some USD3 billion of debt. This deal, referred to as “definitive and conclusive” by a representative of the bondholders, comes off the back of a number of false starts. Zambians have now grown accustomed to the tentative nature of such announcements. Last June a big announcement was made at a summit in Paris that Zambia had reached a deal with its official creditors, news which was followed in October with another announcement that a similar deal had been arrived at with private creditors. And then November brought news that negotiations had collapsed due to a standoff between official and private creditors. This is why Zambians have welcomed last week Monday’s announcement with bated breath.
So what’s in the latest deal and what does it mean for Zambia?
Basically the new deal requires the issuing of two new bonds to replace the three bonds collectively worth USD3 billion that were originally due in 2022, 2024 and 2025. One of the new bonds (called Bond A) is worth USD1.7 billion and will be paid off between now and 2033 (i.e., over 9 years).
The second bond (called Bond B) is worth USD1.35 billion and is more interesting in how it is structured. This bond will either be paid off over a narrow two-year period much much much later (between 2051 and 2053) or a narrow two-year period relatively soon (between 2032 and 2035). Whether Bond B is paid-off later or sooner will depend on how well the Zambian economy performs between 2026 and 2028. Should the economy improve in the period 2026 to 2028 (called the trigger period) then Bond B will fall due earlier and create a level of debt distress in 8 years time given that its interest payments will coincide with those of Bond A. For example, it is likely that debt service payments on the Eurobonds alone in 2032 and 2033 could be as high as USD700 million should Bond B fall due earlier! And it is worth remembering that Eurobond debt constitutes only a part of total debt and official creditors have also structured a similar deal (with similar triggers) which might add on to this aspect of debt distress in the early 2030s. So it is possible that debt restructuring becomes self-defeating in the sense that it improves economic performance only for this performance to trigger another debt crisis that subsequently slows down economic performance and takes us back to square one.
Will we ever win?
Grieve Chelwa is Associate Professor of Political Economy at The Africa Institute and non-resident Senior Fellow at Tricontinental: Institute for Social Research.