(African Stand) — Zambia is set to be the first African country to default on its debt since the start of the coronavirus pandemic, as the southern African nation ruled out making an overdue debt payment after investors rejected its request for a standstill.
Zambia’s government signaled that it would miss a deadline at the end of Friday to pay interest on US dollar bonds after it failed earlier in the day to secure an agreement with bondholders to impose a six-month standstill on debt payments.
Bwalya Ng’andu, the finance minister, told Reuters that he did not intend to make the last-minute interest payment, contradicting an earlier statement by Inonge Wina, Zambia’s vice-president, that “we will not default”.
Failure to pay the $42.5m coupons will constitute a default on $3bn of bonds after Zambia first missed the payment a month ago, amid tense talks with bondholders.
On Friday, a creditor committee representing fund managers holding roughly 40 percent of the bonds voted to block the proposal for a standstill, according to several people familiar with the group’s thinking. The deal needed two-thirds support.
Investors said the government had failed to assuage their concerns over a lack of transparency regarding the country’s other external debts, particularly those owed to China, and over what they see as insufficient guarantees that all creditors will be treated equally.
“There is no transparency, no game plan and absolutely no sign of any engagement with the IMF,” said one member of the creditor group, adding that the last point is essential to put Zambia’s debts back on a sustainable footing. Creditors argued that Zambia had offered no credible plan to get on top of its debt payments in the event that they agreed to its plan for a standstill.
The Zambian finance ministry said in a statement: “While government regrets that the bondholders did not approve the requests made by Zambia in good faith, we remain committed to finding a consensual and collaborative resolution to debt sustainability issues.”
Failure to pay the $42.5m coupons before midnight on Friday would constitute a default on Zambia’s dollar bonds. The debt continued to trade at a heavy discount to its face value on Friday, with a bond maturing in 2027 at 44 cents on the dollar.
Zambia was already struggling with ballooning debt before the Covid-19 crisis, which further weakened its finances. Its attempts to restructure $12bn of borrowings is seen as a crucial test case for poorer nations trying to find debt relief during the pandemic. It has benefited from a G20 initiative to halt payments to official bilateral creditors this year, but private creditors have been unwilling to participate.
“Zambia may be the first country to default on its debt since the start of the pandemic, but it certainly won’t be the last if international creditors refuse to work together and support a comprehensive debt standstill,” said Edwin Ikhuoria, director for Africa of the One Campaign against poverty.
The country now faces the prospect of lengthy and complex negotiations with creditors, who, if no restructuring is agreed, could take the country to court to get their money back.
Zambia’s government has said it will treat all creditors equally, but bondholders had raised concerns that some Chinese lenders will take part in a debt suspension only if their share of $200m of arrears is cleared first.
The lack of transparency on the scale and terms of its Chinese borrowings will complicate the process of restructuring its debt and could hinder attempts to unlock aid from the IMF, according to Simon Quijano-Evans, the chief economist at Gemcorp Capital.
“Zambia needs to put all its cards on the table if they want to reach a solution,” he said.